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5 key points for becoming financially independent

Archive for the ‘Pensions’ Category

5 key points for becoming financially independent

Wednesday, June 24th, 2020

Financial independence can seem like the holy grail. We may be striving towards it but feel bombarded by lots of conflicting messages on how best to attain it. These five points give an interesting perspective:    

Income is not the same thing as wealth

Having a high salary can help you accumulate wealth but that’s no good if you’re still spending more than you earn. That’s why you might hear of a professional footballer earning £30,000 a week going bankrupt while a bus driver, who’s saved diligently all his life, can retire a multi-millionaire. To avoid the spending trap, remember your real wealth or net worth is the amount on your balance sheet – your assets minus your liabilities.

Regardless of what your income level might be, try and achieve financial independence by thinking long term. What goals can you put in place regarding your career plans, your investments or any property you may have?        

Create surplus funds

To take advantage of any investment opportunities, you need to have sufficient money to invest, and to be successful in investing, you need to reach a critical mass. At this point, the returns generated on your savings will have more impact. For example, a 10% return on £10,000 would give you £1,000 before tax, while the same return on a portfolio of  £1,000,000 would give you £100,000 for the same amount of effort and research.

Amassing wealth is a gradual process but through small steps to cut expenses or generate income, it can amount to something over time. When the interest your money has earned starts to earn interest too, that’s when you’ll really start to notice the difference. This is where the power of compounding comes in. It also means you can invest more the next time an opportunity comes round and so on.     

Taxes have an impact

Think carefully about where you hold your assets. Remember not all income is treated the same. You may have a great deal of wealth but be generating a lot of taxable income, while someone who has attained their goal of financial independence may have maximised their capital gains allowance and done some tax-efficient retirement planning.

Take control of your time

Your definition of financial independence may be being in charge of how you spend your time each day. Enjoying what you do for hours on end can be better than any financial return. So while you may not have quite reached your ultimate investment target of maintaining your ideal lifestyle without a monthly paycheck, having the freedom to spend your time how you want is worth a great deal.             

Promote the same values

Becoming financially independent is easier if the rest of your family shares the same goal and beliefs. Does your husband or wife have a similar attitude to saving, investing and risk as you?     

Encourage your children to grow up to be financially independent and manage their own money. Offer them support but don’t let them grow up always expecting a financial hand-out or free board. You’ll never gain financial freedom and neither will they.     

 

Retirement planning in the time of Covid-19

Wednesday, June 24th, 2020

The COVID-19 outbreak has signalled the dawn of a worrying time for everyone. As well as anxiety about our own health and the wellbeing of our loved ones, many of us are understandably worried about the financial future. Recent stock market turbulence is concerning for all investors, but particularly for those who are in defined contribution pension schemes and looking to retire in the near future.

The important thing is not to panic. Although we are in very uncertain times, reckless actions could severely endanger our financial wellbeing in the future. Here are some things you should consider if you’re planning to retire in the next few years:

Don’t cash out suddenly

Cashing out in a panic could severely damage your financial security in retirement. Although no one knows when the markets will recover, selling now could mean that you are taking your pension at the bottom of the market. It’s likely that financial markets will regain their strength over a period of time, even if we don’t know how long this could take.

What’s more, cashing out will mean that you’re likely to end up paying lots of unnecessary tax. In most cases, only the first 25% of a defined contribution is tax free; the rest is taxed as income. Chances are you’ll end up with a gigantic tax bill.

Remember that pensions aren’t the only form of retirement income

Retirees frequently use other assets such as cash ISAs, cash savings and rental income to provide for their life in retirement. If you have any other assets, you could use these to fund the first few years of your retirement in order to give your pension time to recover. The benefit of this would be that you wouldn’t be drawing from your pension pot when the markets are low.

If you don’t have any other assets to fund your retirement, you could consider delaying your retirement or working part time for a period. Hopefully, this would allow the markets time to recover, giving you more confidence when you finally do leave the workforce. 

Watch out for scams

Unfortunately, some unscrupulous people see times where people feel financially vulnerable as an opportunity to exploit them. There has been a lot of fraud since the start of lockdown and it has been reported that people are being scammed through being sold non-existent pension plans. 

Whatever you’re planning to do with your pension savings, it’s vital to check that the company you’re planning to use is registered with the FCA. Keep on your toes and if you see anything that looks too good to be true, it probably is.

What’s happening to the tapered annual allowance?

Thursday, February 6th, 2020

There has been much talk in the financial press recently of proposed changes to the threshold for the tapered annual allowance from £110,000 to £150,000.

The taper was introduced in 2016 and gradually reduces the annual allowance for those on high incomes. For every £2 of adjusted income above £150,000 a year, £1 of annual allowance is lost. 

It has proved unpopular as individuals in that earnings bracket can have their annual tax-free pension savings allowance reduced from £40,000 to as little as £10,000. They are also at risk of  receiving a lifetime allowance tax charge on their benefits.

The situation gets confusing because it hinges on adjusted and threshold income. Adjusted income includes all pension contributions (including any employer contributions) while threshold income excludes them.

To make matters worse, HMRC start with ‘net income’ but do not just mean ‘income after tax’. In this context, they count all taxable income less various deductions, such as member contributions to an occupational pension scheme under the net pay arrangement. 

The sponsoring employer of the pension scheme will deduct employee contributions before deducting tax under PAYE. These can be higher for many NHS workers compared with the private sector, as they are saving into a ‘defined benefit’ scheme.

This is why the taper threshold has caused particular problems for the medical profession.   Many doctors have been forced to limit the work they do in an attempt to avoid significant charges on their pension. The system has reduced any incentive in accepting promotions and has encouraged many to consider early retirement.      

As a result of the pension crisis in the NHS, the Treasury has outlined plans to address the taper and increase the tax relief. The average earnings for a consultant are £112,000 so an estimated 90% would fall under the new limit of £150,000.   

However, representatives of the British Medical Association (BMA) state that the proposals do not go far enough and will in fact cause even more of a ‘tax cliff’. Just increasing the threshold  will do nothing, they feel, to reduce the complexity of the taper.           

Pension specialist, Helen Morrissey, calls for the taper to be scrapped altogether, describing the plan as a sticking plaster when major surgery is required.             

It’s a topic to watch carefully. HMRC face a substantial decrease in revenue if they do make changes to the annual tapered allowance but the government has pledged to try and solve the crisis.

If you have any queries about how an increase in the threshold would affect you, do get in touch.

Why Business Owners Fail to Plan their Retirement

Wednesday, January 29th, 2020

Company directors and owners of SMEs make plans and do forecasts all the time. Cash flow forecasts, SWOT analyses, plans for renewals and refurbishment; there’s hardly a day when they’re not eyeball to eyeball with a spreadsheet.

So why do so many of them fail to plan their own retirements properly? In our experience company directors and owners of SMEs are so wrapped up running their business that they often forget their own financial planning – or simply don’t see it as a priority. There is clearly a need for more directors to plan properly: why do so many of them fail to do so?

Over the years we’ve probably been given half a dozen answers when we’ve asked that question. As you’ll see, none of them really hold water…

“I haven’t got time.” The simple fact is that no one ever has time. And yet planning your retirement is one of the most important jobs you’ll ever do. As the old saying goes, a director or owner of a small business will either walk out of his business or be carried out of it. Assuming your preferred course of action is the former, then there needs to be enough money waiting when you do eventually walk out – and the only way you can make sure of that is to plan for it.

“It’s too early/too late.” It’s not too early if you’re in your twenties or thirties and it isn’t too late if you’re in your fifties or sixties. We know that in your twenties and thirties you’re working all the hours in the day to build your business: but trust me, you will get older – rather more quickly than you think. And yes, of course it’s easier to achieve savings targets if you have more time but the simple fact is that there is need for financial planning at all ages, as personal circumstances and financial planning goals are always changing.

“I’m going to keep working.” There seems to be a trend amongst some business owners and directors at the moment to declare that they’ll never stop working, that nothing is as satisfying as working so why would you ever want to stop? Unfortunately your health, your family and your competitors may eventually play a part in this decision. In our experience, there comes a time for every entrepreneur and director when ‘enough is enough’ and when that time comes it needs to have been planned for.

“It’s boring/not worth it.” In some ways this is one of the easiest objections to understand. Many directors and entrepreneurs – especially younger ones – have seen their own parents dutifully save for retirement and then not be very well off when they do finish work. Unfortunately, everyone now working faces a very simple fact: the population is getting older and the Government simply won’t be able to fund the retirement you want.

“The numbers are too big/too frightening.” Sadly, this is a reflection of proper financial planning. If we’re going to plan for the retirement you really want then the numbers will be big – and they will be challenging. But there is no point in us preparing a financial plan which provides less than you want – and it’s surprising what can be achieved if you save consistently and keep your savings and investments under regular review.

“My business is my pension.” Despite the fact that virtually no businesses are sold at exactly the right time for exactly the right amount of money, many directors and business owners still say this. Of course the answer is to build your business but you also need to build cash outside your business as well. That’s what gives you choice and control and, ultimately, that’s what allows you to dictate the timing and the quality of your retirement.

We’re always happy to talk about a client’s retirement planning. Directors and business owners can plan for their retirement very tax efficiently – and they enjoy flexibility which certainly isn’t available to normal employees. It makes sense to explore the options: we promise you that it isn’t too late and we’ll do our best not to be boring!

The election result and your finances.

Wednesday, January 22nd, 2020

With the Conservative’s having won their largest majority since 1987, we thought now would be a good time to reflect on some of the pledges made during the election campaign. How will the promised reforms affect you and your finances? 

Increase of the National Insurance threshold

The NIC threshold is set to rise from £8,632 to £9,500, which will lead to savings of around £100 a year for the 31 million workers who earn above that amount. Over the long term, the Conservatives have set an ambitious £12,500 threshold which would result in a tax reduction of £500 for those who earn over that figure.  

State pension triple lock

The state pension lock is set to be maintained, which is unsurprising, particularly after Theresa May’s plans to change the system cost her voters back in 2017. Currently, under the triple lock the state pension increases year on year, in line with whichever is the highest of these three measurements: the average earnings increase, the rate of inflation or 2.5%.

Further pension pledges

The government has pledged to address a separate pension anomaly which can result in people earning under £12,500 to be denied pension tax relief, if their provider uses the ‘net pay arrangement’ approach as opposed to the ’relief at source’ method. 

The government has also mentioned that it will address the ‘taper tax’ issue that is causing many senior NHS medical professionals to turn down work and overtime, rather than risk a retrospective pension tax charge. 

Steve Webb, director of policy at Royal London, raises the concern that there is a “lack of detail” in the suggested reforms, mentioning that “the measure proposed is far too narrow and may not even work. The tapered allowance affects far more people than senior NHS clinicians and creates complexity and uncertainty in the tax system.”

More will be revealed, no doubt, when Sajid Javid delivers his budget on 11 March.  

Income tax

When he was battling for leadership of the Conservatives, Boris Johnson promised to reduce Britain’s tax burden, making the bold statement that he would raise the threshold for the 40% higher-rate income tax band from £50,000 to £80,000. This would have resulted in serious tax savings for the top 10% of earners. It appears, however, that the plan has been shelved, at least for now. 

Rest assured, we’ll keep our ears to the ground and will update you of any significant policy changes in the budget that might affect your finances. In the meantime, if you have any queries, please don’t hesitate to get in touch.

Gender gap even affects children’s pensions

Thursday, December 5th, 2019

 We’re familiar with the gender gap in pensions for adults but there is evidence that this actually starts much earlier on. According to data from HMRC, parents and grandparents are more likely to save into a boy’s pension than a girl’s.

A Freedom of Information request by Hargreaves Lansdown revealed that 13,000 girls aged 15 or under had money paid into a pension for them in 2016/17 compared with 20,000 boys. The disparity means the pension gap can actually start from birth onwards. 

This only exacerbates the situation as women are likely to have less in their pension due to the gender pay gap. Nest found men are twice as likely to be in the highest income bracket and women are three times as likely to be earning less than £10,000 per year, which is the auto enrolment threshold for a single job.

Women are also more likely to take career breaks or work part-time to bring up a family. Added to which, they are more likely to live longer and spend longer in retirement so, in reality, will need more in their pension pot than men.       

Research in 2017/18 by the union Prospect found that the pensions gender gap equated to 39.9 per cent or a £7,000 gap in retirement income between women and men.  

Hargreaves Lansdown has calculated that paying £100 per month into a child’s pension until the child reaches 18 can increase their savings by as much as £130,000 by retirement. Yet the cost is only £21,600 plus tax relief of £5,400. Forward planning pays off!

Someone without any earnings can pay up to £2,880 each year into a pension and receive 20 per cent tax relief (up to £720) so it’s possible for parents and grandparents to make a significant difference to a young person’s financial future by starting a plan early. An added advantage is that once the money is in a pension, it can grow without attracting capital gains tax.              

It’s unclear why the anomaly between paying into boys’ and girls’ pensions has existed in the past. Some feel it may be because gifting has traditionally come from the baby boomer’s generation where men were more likely to have had the greater share of pension in retirement. 

Whatever the reason historically, the current message is to use children’s pensions to give the younger generation a helping hand but to do it equally.

How to retain your lifestyle in retirement

Wednesday, October 30th, 2019

Do you feel like you just go to work day in, day out, with the weeks quickly turning to months and the months to years?    

If that’s the case, you may be going through life with a vague notion that your pension contributions will be enough to give you a comfortable retirement without having done any precise calculations of late.      

Unfortunately, this means you could be on track for a significant shortfall. 

The pension and investment provider, Aegon, warns that members of Defined Contribution (DC) schemes will find that their retirement income will fall short of their expectations if they simply rely on the minimum automatic enrolment contributions and the state pension (currently £8,767). 

According to the insurer’s findings, most DC savers will need to increase their contributions to ensure they enjoy a similar lifestyle in retirement to their current one. It’s, therefore, worth taking stock as early as possible to find out how much more money you need to save.     

The figures Aegon used came from the government’s 2017 auto-enrolment review and highlighted broad target replacement rates (the percentage of an employee’s pre-retirement monthly income that they receive each month after retiring).          

Someone earning an average salary of £27,000 would need a 67 per cent replacement rate to maintain their lifestyle from pension savings of £303,900. They would require an income of approx £18,000 per annum in today’s money to continue to live in the way they were accustomed.    

On top of the state pension of £168.60 a week, a 22-year old earning £27,000 would need to contribute an additional 4 per cent to the current 8 per cent minimum combined contribution to reach their required monthly income. Failure to do so could result in a shortfall of £106,500. The extra contribution required would increase with age to:  

  • 13 per cent more for a 35-year old 
  • 29 per cent more for a 45-year old 

These figures are based on individuals just being in auto-enrolment schemes and having no existing pension pot. The additional percentages may sound steep but, with tax relief from your own employee contributions, it could cost as little as 1.6 per cent from your take home pay to reach the 4 per cent specified.

The key message is to take stock now. Think realistically about how much you will need to get close to maintaining your lifestyle once you retire. If a shortfall looks likely, explore the option of  paying more than the automatic minimum as early as possible. The longer you wait, the harder it will be to catch up.

How to keep track of your pensions

Wednesday, October 9th, 2019

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.

Retire a little later?

Wednesday, October 2nd, 2019

This may seem a surprising suggestion. Surely most people are eagerly looking forward to early retirement, not thinking about postponing it? More time to travel the world, spend on the golf course or help out with the grandchildren sounds an enticing prospect rather than more years at work.

But times have changed significantly since the state old age pension was first introduced in 1909. In those days, it was paid to those aged 70 or more and people weren’t expected to live many years beyond that.           

Nowadays, the state pension can be taken at 65 (66 next year), although this does depend on gender and date of birth. Yet, at the same time, life expectancy has increased. People live on average at least another fifteen years beyond their three score years and ten. 

Back in 1948, a 65-year-old would expect to take their pension for about 13.5 years, equating to 23% of their adult life. This has risen steadily. Figures in 2017 showed that a 65-year-old would expect to live for another 22.8 years, or 33.6% of their adult life.

A significant number of people even live to 100 these days. So much so that the Queen has had to expand her centenarian letter writing team to cope with the number of people requiring a 100th birthday message from the Palace.       

According to the Office of National Statistics, the number of centenarians in the UK has increased by 85% over the last 15 years.This trend is set to continue so that by 2080 it is anticipated there will be over 21,000.

In recognition of the fact that people are living longer and spending a larger proportion of their adult life in retirement, a government review will consider increasing the state pension age to 68 between 2037 and 2039.  

Currently, if someone retires at 65 and lives to 100 it makes for a long retirement. Not only is it  expensive for the state to maintain, the individual is worried about outliving their finances rather than being able to get on and enjoy their retirement. The state pension was not designed to support a long period of limbo. 

Against such a backdrop, it makes sense for some individuals, if they are fit, healthy and capable, to consider working beyond their pension age. There is no longer any default retirement age at 65, so it is perfectly possible to do this.  

The older generation also have a great deal to contribute to an employer in terms of experience and commitment. In addition, it’s well known that going to work each day gives some people a reason to get up in the morning and also to keep young. There are many unfortunate cases where someone has worked all their life, looking forward to their retirement, only to fall seriously ill or die the moment they stop work.    

The number of 70 year olds in full or part-time employment has been steadily increasing year on year for the past decade, according to data from the Office for National Statistics. This hit a peak of 497,946 in the first quarter of 2019, an increase of 135% since 2009. 

So rather than just worry about whether you will have enough for your retirement, maybe it makes sense to keep working a little bit longer.  

Five million pension savers at risk from scammers

Wednesday, September 11th, 2019

A joint warning from The Pensions Regulator (TPR) and the Financial Conduct Authority (FCA) says that five million pension savers could be risking their retirement pots due to scammers. Which has left people feeling, as you can imagine, a little bit worried. 

The regulators’ warning came after research revealed that 42% of pension savers could be at risk of falling for common tactics used by scammers. The survey questioned more than 2,000 adults aged 45 to 65 and came up with some rather astonishing results. 

The research suggested that cold calls, exotic investments and early access to cash are among the most effective tactics utilised by scammers. It later found that 60% of those who are actively looking for ways to boost their retirement income are likely to be hooked by a scam. 

Further to this, the survey found that 23% of those enrolled in pension schemes would pursue high risk, exotic opportunities if offered to them, while 17% said they would be interested in early access. Of all respondents, 23% said that they’d actually discuss their pension plans with a cold caller. 

Pensions and financial inclusion minister, Guy Opperman, said that scammers were, “nothing short of despicable.

“We know we can beat these callous crooks, because the message out there does work. Last year’s pension scams awareness campaign prevented hundreds of people from losing as much as £34m, and I’m backing this year’s efforts to be bigger and better.” 

Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, said: “It doesn’t matter the size of your pension pot – scammers are after your savings. Get to know the warning signs, and before making any decision about your pension, be ScamSmart and check you are dealing with an FCA authorised firm.“

The warning comes after the FCA revealed more than £197m was lost to scams in 2018. Two victims even lost more than £1m each! 

You can check out information on how to stop scammers on the FCA’s ScamSmart website

If you have any concerns about a phone call you’ve received or any other communications from an unfamiliar source, get in contact and we’ll make sure to steer you away from any scams.