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5 pitfalls that put your retirement plans at risk

Archive for the ‘Pensions’ Category

5 pitfalls that put your retirement plans at risk

Thursday, May 3rd, 2018

Imagine the scene; you’ve spent your life living frugally, saving efficiently and investing wisely. You enter your well-earned retirement financially secure and excited for the years ahead. The future could pan out in one of two ways; the first could lead to continued security and the financial freedom to enjoy your retirement as planned; the second might lead to the unfortunate disappearance of that security and the resulting stress that would involve.

The sad truth is that the things that lead people down the second path are usually easily avoidable; it’s rarely investment market declines which are the cause of a failed retirement strategy. Here are the five most common pitfalls that you can avoid through careful planning.

1. Helping too much

We all have a natural desire to help our loved ones, but helping too much can lead to harming our own plans. It’s all too common for people to dip into their retirement funds to give money to their children, grandchildren and other relatives. There’s nothing wrong with lending a hand or giving gifts, but you have to know what you can afford and stick to your limits. Don’t be afraid to admit you can’t help.

2. Buying a second home

Having your own little getaway or spending your winters in the sun may seem like a fantastic prospect, but it’s important to be realistic. A huge portion of your retirement capital can be tied up in owning a second home, and there are often unexpected costs involved. In the past you could count on property values to appreciate, but that isn’t true of many areas now. If you want a second home in retirement, make sure you have a substantial financial cushion.

3. Unmanageable debt

Debt can sometimes be considered a financial management strategy rather than something to steer clear of in retirement. Some financial advisers may recommend investing cash to earn a higher return than the interest rate of the debt, instead of paying off the debt altogether. It does, however, come with fixed expenses and if those expenses combine with unexpected expenditures and begin to exceed your fixed income, problems can arise. Avoiding debt during retirement where possible will help avoid financial uncertainty.

4. New business ventures

A lot of retirees choose to continue working and producing income in some way. Many may decide to start new businesses. If this is something you’re considering, be careful and separate most of your retirement assets from the business. Only risk capital that you don’t need to sustain your standard of living as a failing business can erode your nest egg quickly.

5. Absence of a spending plan

One of the easiest mistakes to make is not planning your spending. A lot of retirees don’t know how much money is safe for them to spend in the early years and still ensure they have enough capital to last into their later years. Surveys suggest that people believe they can spend 7% or more of their savings each year safely, however, financial planners and economists say the spending limit is closer to 4%.

Everyone’s optimal spending plan will vary and, ideally, you should revisit your estimates each year to make adjustments. If you have any questions around this topic, please feel free to get in touch with us directly.

Pensions: what is the tapered annual allowance?

Thursday, April 12th, 2018

One of the key advantages of saving for your retirement through a pension scheme is the tax relief you receive on the money you contribute, usually available at your usual rate of tax. The ‘Annual Allowance’ limits the amount of contributions both you and your employer can make to your pension in a year which benefit from tax relief, and is currently set at £40,000.

However, in April 2016, the government also introduced the ‘Tapered Annual Allowance’, which reduced the annual limit for those whose total income exceeds £150,000. This amount includes your salary, bonuses, dividends, savings interest and employer pension contributions. For every £2 of income above £150,000, your Annual Allowance will be reduced by £1, up to a maximum reduction of £30,000. So that those who receive a one-off increase in pension contributions from their employer are not unfairly caught out, the government also ensured that the Tapered Annual Allowance only applies to those whose taxable income before employer pension contributions is above £110,000.

Looking at some examples shows how the Tapered Annual Allowance works. Andy receives a salary of £160,000 in the 2017/18 tax year, with a further £16,000 of pension contributions from his employer. This gives a total income of £176,000, which is £26,000 over the £150,000 limit. Andy’s Annual Allowance is therefore reduced by £13,000 (half of that amount), meaning the amount of his pension contributions which can benefit from tax relief during 2017/18 is lowered from £40,000 to £27,000.

Bethany, meanwhile, earns a salary of £195,000 in the same year, with her employer making £15,000 of pension contributions. Her income from rental properties, savings and a share portfolio amounts to £20,000, giving Bethany a total income of £230,000, exceeding the £150,000 limit by £80,000. As half of this amount is £40,000, Bethany will receive the maximum reduction of £30,000. She will therefore only receive tax relief on up to £10,000 of her pension contributions in 2017/18.

If the Tapered Annual Allowance affects you and you’re wondering whether there are any legal workarounds which can be implemented to avoid being hit by it, the short answer is that there aren’t. Of course, if your total income decreases then your Annual Allowance will increase again. But apart from either earning less or reducing the amount you and your employer contribute to your pension (neither of which is a good idea), as long as your total income is over £150,000 you will be subject to the current rules.

Will the cold calling ban stop pension fraud?

Wednesday, March 21st, 2018

You may remember the 2014 budget, where the Government announced that pensions freedoms would be introduced, to start in the 2015/16 tax year. Lauded as a great step forward, it allowed savers aged 55 and over the legal right to move their money; taking the whole amount as a lump sum and paying no tax on the first 25%, with the rest taxed as if it were a salary at their income tax rate.

Whilst this may have been a great step for freedom of personal finances, like with any great step, unfortunately, there have been people who have sought to exploit it.

Pension fraud has reached near crisis levels. It’s thought that around 250 million cold calls are made in Britain every year – that’s enough for 8 every second. Too many of these fraudulent cold calls are successful as official figures have revealed that in the last three years, pensioners have been conned out of £43m, with the average victim losing £15,000.

Thankfully, the Government has now confirmed that it will introduce a ban on cold calls by June, in an attempt to halt the flow of pension money into the hands of these fraudsters. However, whether this ban is enough to actually stop the scammers is something that is being discussed and doubted by experts.

Tom Selby, of the personal pension firm, AJ Bell, has said that “the ban sends a clear message to people that if they receive a cold call about their pension, they should simply hang up the phone.”

“However, the reality is scammers are becoming increasingly sophisticated and in the time it has taken policymakers to introduce this ban, tactics have evolved. We have always said a cold calling ban should be viewed as the beginning of the onslaught on pension scammers and we urge the Government and regulators to consider further interventions to protect savers.”

One such suggested intervention is to create a “permitted list” of safe pension schemes, so cash can only be released to pre-approved funds.

Ultimately, the scammers will continue to scam and savers have a legal right to move their money into any scheme they wish which, sadly, may include fraudulent and high risk ones. The ban will raise awareness of the risks, but the best way to stay protected is to always be on your guard.

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

Four things to look out for in the new tax year

Wednesday, March 21st, 2018

With a new tax year come changes to tax and benefits. But just as it’s important to know what changes are being made, it’s equally, if not more important, to actually understand how the change affect you or your business, or if it even has an impact on you at all. Here are four of the key changes to look out for at the start of the 2018/19 tax year and how to work out whether or not you need to do anything.

  1. Employer pension contributions – It’s likely that you’ll have heard about the increase for employer pension contributions through auto-enrolment, but you might not be so clear on exactly what your business will have to do to meet the new minimum contribution. If, in April 2018, an employer already contributes the minimum 2% or more, and the total contribution of both the employer and the employee is 5% or more, the employer doesn’t need to change anything. If the employer or total contribution is under the respective figure, an increase will be needed. It’s also worth remembering that from April 2019, the minimum employer contribution goes up to 3% and the total contribution to 8%.
  2. Salary sacrifice and P11D – Whilst the law still states that a P11D needs to be provided for certain benefits provided under an optional remuneration arrangement, usually known as a salary sacrifice, HMRC has conceded that this won’t be the case for particular instances. This is due to PAYE regulations not being updated to accommodate the ‘relevant amount’ which is the new taxable value. In such cases, as long as the correct relevant amount has been payrolled by the employer, a P11D won’t be needed for 2017/18.
  3. National minimum wage increase – The increase applies to the first pay period beginning on or after 1st April 2018. If the change falls in the middle of an employee’s pay period, it’s not necessary to adjust the old and new national minimum wage rates; the increased wage should simply be implemented for the first pay period after 1st April.
  4. Childcare vouchers – it was proposed that new entrants would not be admitted to employer-provided childcare voucher schemes from 6th April 2018. Following a Commons debate, the deadline has been extended to October 2018.although this still means it is one to watch out for in the 2018/2019 tax year.

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.