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Top tips to make your retirement savings last

Archive for the ‘Pensions’ Category

Top tips to make your retirement savings last

Wednesday, November 15th, 2017

When it comes to saving for when you retire, at the very least you want to ensure that you’re going to have enough to pay for your living costs for the rest of your life. However, what you probably want to be aiming for is a nest egg which allows you to truly enjoy your life after work and do all the things you’ve planned for as you’ve saved. Some pensioners find themselves in a position where they have to compromise on what they can do during their retirement simply because of a lack of funds. So here are our top tips for retirees to help avoid finding yourself in that position.

  1. Commit more time to saving money – Once you retire, you’ll have a great deal more time available to you, meaning you should find it easier to spend time doing things that will help your money go further. One way of doing this is through a part-time job; but if you’re not keen on going back to work once you’ve retired, take time to collect coupons and hunt down special offers which you might not have had the time to do when you were working. This will help your monthly income go further.
  2. Consider your risk/balance – Most pensioners opt for low-risk investments as they depend on their pension and are not in a position to recover should the risk fail to pay off. However, taking calculated risks could help yield greater returns without opening yourself up to financial jeopardy. Deciding how much of your portfolio you’d be happy to put in higher-risk investments will be an individual decision, but is an option to consider as it can be a successful way to add to your pension at the same time as drawing down from it.
  3. Make sure you’re not paying too much in tax – Whilst you’ll never be in a position to pay no tax at all, your tax commitments are likely to change once you retire, so ensure you’re only paying the taxman exactly what you need to. Returning to the first point above, you’ll have plenty of time to investigate exactly what you should be paying in tax, so do some research and see what you can save.
  4. Come up with a budget and stick to it – If you’ve budgeted during your working life, this shouldn’t change when you retire, and if you’ve not managed to budget before then it’s never too late to start. Knowing exactly what you have coming in and going out each month means you’ll also know precisely how much money you can spend on enjoying yourself without worry or guilt about doing so.

Millennials leading the way in saving for retirement

Thursday, November 9th, 2017

Recent data suggests that younger generations are on track to save more than their parents and grandparents, despite their earnings on average being considerably lower. Part of the reason for this is time: simply put, young people have more years ahead of them than older generations until retirement, meaning that any money they put away now has more time to grow.

But it’s also become apparent that many younger workers are also managing to put away a significant amount each month – in some cases up to 15% of their income – by making some considerable sacrifices. Some of these are undoubtedly luxuries, such as eating out and going on holiday, but the savings are substantial: restaurants on average charge a markup of 300%, making eating at home a great way to cut costs. The rise of the ‘staycation’ – saving money by holidaying at home and exploring free or cheap activities to enjoy – also helps younger people to find more money to put towards their savings instead.

However, some of the costs that millennials are willing to cut in order to save are at the opposite end of the scale. More young people are choosing not to continue in education to help them save. The financial benefits of this are twofold: not only does this remove the expense of continuing on to college or university, but it also allows a young person to begin working full time earlier in their life, which in turn allows them to start saving sooner. It’s a sacrifice some would not be willing to make but is nonetheless an attractive option for others, especially as more opportunities to earn qualifications through full time work become available.

Housing and car ownership are also areas where considerable savings can be made. Perhaps the most personal sacrifice some millennials are making is to limit the number of children they have in order to find more money to save.

It will always be a matter of individual choice as to what people decide to spend or not spend their money on but the data highlights that the decisions made now have a significant impact for the future.

What will the new Finance Bill contain?

Wednesday, October 18th, 2017

A second draft of the Finance Bill 2017 was introduced in September following the first draft released earlier in the year. The government used this second version to reintroduce measures that had been taken out of the earlier, shorter draft following Theresa May’s decision to call a snap election.

The new draft includes new penalties for those who allow the use of tax avoidance schemes which are subsequently defeated by HMRC, and changes to prevent artificial schemes being used by individuals to avoid paying the tax owed on their income. The rules surrounding company interest expenses have also been updated to ensure excessive interest payments can’t be used by big businesses to reduce their tax payments.

The new Bill ensures that people who have lived in the UK for many years pay tax to HMRC in the same way as UK residents through the abolition of permanent non-dom status. The dividend allowance has also been reduced from £5,000 to £2,000 effective from April 2018, a move which will bring the tax treatment of people working through their own company and those who are self-employed or employees further in line with each other. The Money Purchase Annual Allowance has also been lowered from £10,000 to £4,000 in order to limit an individual’s ability to recycle pension savings in order to receive additional tax relief.

As these are all measures which were dropped from the Finance Bill before the election in June, the Finance Bill is unlikely to have held any surprises for many people. The only measures which have been dropped are two clauses on Customs enforcement powers and a third on landfill tax. It is expected that the third Finance Bill of 2017, due in December, will contain significant landfill tax proposals following announcements made in September. Also of note in the Bill are clauses looking ahead to Making Tax Digital, with digital tax returns currently likely to become mandatory from 2020.

Too late to start saving?

Wednesday, October 11th, 2017

Not beginning to save towards your retirement until you reach your fifties would not so long ago have been considered leaving matters far too late to put anything meaningful away for your life after work. Previous generations saw building a pension as something to do over an entire career, with contributions throughout your working life coupled with investment growth being the only way to ensure your retirement pot was substantial enough to provide for you throughout your retirement.

However, whilst compound interest still means that anything put away at the start of your career will see some serious growth by the time you need it much later in your life, the reality today for many young people is that they simply have very little to invest when they first begin work. Many may find that they won’t be able to begin saving seriously until they reach middle age.

The reasons for this are several. First of all, your wages are statistically likely to reach their peak for women during their forties and for men in their fifties. Secondly, as the average mortgage term is twenty-five years, most people who bought their home in their twenties are likely to have finished paying it off by the time they reach their fifties. A third key reason is the declining cost of raising children. Whilst it’s unlikely that you’ll stop giving them financial support completely, if you’ve had kids in your twenties or thirties it’s probable that the cost of providing for them will have gone down a great deal by the time you’re heading towards 50.

With considerable tax relief on both ISA investments and pensions, it’s now possible to build a healthy retirement fund even if you only start saving in your fifties. For example, someone with no existing savings, earning £70,000 annually, who started saving the maximum permitted yearly amount of £40,000 at age 50 could amass a pension pot of £985,800 by the time they turn 67, assuming a 4% annual return after charges.

£40,000 a year might sound like a huge amount to save every year, but this amount includes the generous tax relief enjoyed by pension savings. Our £70,000 earner would only need to put away £27,000 of their own money in order to reach the £40,000 contribution, whilst a basic rate taxpayer would need to contribute £32,000 to achieve the same.

So, whilst it’s sensible to begin saving as early as you can, it is possible to begin putting money away when you reach middle age and ensure you have enough to provide for yourself later in life. The last ten years of your working life can reasonably be seen as some of the most important in terms of preparing for your retirement.

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.