Category: Financial Planning

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The Pensions Triple Lock: what does the Government’s broken promise mean for Pensioners?

At the last General Election the Conservative Government made a promise, a so-called “manifesto commitment.” That pledge is commonly known as the “pensions triple lock:” that the state pension will be increased each year by annual price inflation, average earnings growth or a guaranteed 2.5%, whichever is the greater. 

For pensioners this has been good news. It meant that pensions would keep pace with wage growth and inflation and, if both those were low in one particular year, pensioners would be a little better off. 

That, of course, was before the pandemic, the enormous cost of it and the financial juggling the Chancellor will need to do to pay for all the support measures put in place, and the consequent sharp rise in Government borrowing. 

In early September, as had been widely rumoured, the Government broke not one, but two manifesto pledges. It increased national insurance to pay for social care and, crucially for pensioners, it suspended the triple lock for a year. 

This was obviously bad news, and the move begs an immediate question. If the Government has suspended it for one year, could it do it for another year? After all, the bill for Covid-19 is not going to be paid any time soon. 

Unsurprisingly, a poll showed that two-thirds of pensioners were against the suspension. Interestingly though, the research carried out by ComRes suggested that the move would be largely forgiven by the next General Election. 

In this instance the triple lock has been watered down and become a “double lock,” with the wages element removed. But as we hinted above, we might well see other elements removed in the future, now that the precedent has been set. Many commentators expect inflation to hit 4% by the end of the year, could the Government remove that element in the future, too? 

It will be interesting to see what Chancellor Rishi Sunak has to say when he delivers his Budget speech on October 27th. He will presumably be setting out plans for starting to repay the enormous cost of the pandemic. Given the cost of servicing all the new borrowing the Government is vulnerable to a rise in interest rates, and nothing, including the triple lock, can be ruled out. The next Election is not due until December 2024 and the Government may gamble on the pandemic and the measures taken to counter it being a distant memory by then. 

The uncertainty for pensioners means that your ongoing financial planning becomes more important than ever. It is important that your existing savings and investments are arranged as tax-efficiently as possible and that you make use of all your available allowances.

Sources
inews.co.uk/news/uk/state-pension-older-people-wait-imminent-announcement-future-triple-lock-reports-1184161 
https://inews.co.uk/news/uk/state-pension-triple-lock-tory-manifesto-broken-pledge-general-election-1188492 
https://www.bbc.co.uk/news/business-58665538 

“Flexible” careers will increase the need for financial planning

In days gone by, life was relatively simple. You left school or university, you found a job and barring moving away or your employer going bust you stayed with that employer until you retired. 

Today, and especially after the pandemic, that situation has changed significantly. Employees want flexibility, they want the ability to work from home, they want an employer that understands their work/life balance, and one that shares their ethical values. Job security, and the prospect of thirty or more years with one employer, seems to be low on the list of what employees want. 

It is a well-documented fact that millennials – those people who came of age around the turn of the century – will make up 75% of the global workforce by the middle of this decade. They want to work for employers that foster innovative thinking, develop their skills and make a contribution to society. 

But do they want a career? 

According to a study by Aviva, 47% of employees are now less career-focused following the pandemic, with two in five people claiming “they could never switch off” from work. 

24% of women said the pandemic had had a negative impact on their work/life balance as they tried to juggle work, a home, a family and a relationship – compared to just 16% of men. 

Inevitably the impact of technology means that it will become harder to separate work and home life, especially if you work at home and the “office” is only a roll out of bed away. A few years ago France introduced a “right to disconnect ” – a law stipulating that companies with more than 50 employees establish hours when staff should not send or answer emails in a bid to prevent burnout and set a clear barrier between work and home life. We can suspect it won’t be the last country to take such action. 

While a desire for flexibility, home working and career breaks is understandable it does, however, pose some financial planning questions. People will still need mortgages – which are clearly more difficult to obtain without a consistent employment history. People will still need to plan for their retirement which, again, becomes more difficult with career breaks and frequent changes of employer. 

Throw in savings and investments and it becomes clear that while the workforce of the future may want flexibility and everything that goes with it, what it will most emphatically need is consistent, long-term financial planning from experienced advisers. 

Sources
https://www.bbc.co.uk/news/business-57798908 
https://www2.deloitte.com/content/dam/Deloitte/global/Documents/About-Deloitte/gx-dttl-2014-millennial-survey-report.pdf
https://fortune.com/2017/01/01/french-right-to-disconnect-law/

Financial planning in a post-pandemic world

‘Fail to plan, plan to fail.’ It’s an expression that anybody who has worked in management or the military must have heard a thousand times. Like all oft-repeated clichés, it carries a kernel of truth – and in no aspect of human life is the phrase more apt than in financial planning. 

Unless you have a financial plan; for retirement, for saving, for long-term investment, for buying your home, for estate planning; then you cannot realistically expect to achieve your financial objectives. 

Sceptics may ask ‘What’s the point of financial planning? What’s the point of any planning? We’ve just lived through the most turbulent, changeable year in any of our lifetimes.’ 

At first glance, it’s a valid point. On March 23rd last year the UK – like so many countries around the world – went into lockdown. Further lockdowns followed. Tens of thousands of people lost their jobs. Businesses which had taken years to build were wiped out overnight. Stock markets around the world experienced tumultuous times. 

But 13 months later a vaccine programme is being rapidly rolled out. The economy is rebounding. Many of the world’s leading stock markets actually gained ground in 2020. All the world’s leading markets – with the exception of China, which fell 1% – made gains in the first quarter of this year. 

What the last 13 months illustrates is not that there’s no point to financial planning: rather the reverse – that it is more important than ever. Pandemic or no pandemic, house sales continue, we still have to save for our retirement and – with a hefty bill for Covid to pay – the Government is still going to tax us on our savings, investments and our final estate. 

What is interesting is that the fundamentals of financial planning have been completely unaffected by the pandemic. If the last 13 months have taught us anything, it is that what we previously thought couldn’t happen can happen – and in many cases happen very quickly – so we need a plan, we need savings: we need a buffer.

It has also reminded us that saving and investing is a long term commitment, and that there will always be short term fluctuations. More than anything though, we have been reminded how important regular contact between a financial adviser and a client is. Plenty of our clients have needed reassurance over the last 13 months: plenty have had questions that needed answering. We have been happy to do both. 

There will undoubtedly be changes in the future, whether those are what Harold Macmillan famously called ‘events’ or clients drawing on the last year to re-evaluate what they want from life and their financial planning. We will always make sure that your financial planning is flexible enough to cope and to adapt. But make no mistake: the old adage ‘Fail to plan, plan to fail’  still rings true.  

Sources
https://www.marketwatch.com/tools/marketsummary

More than half of UK adults now seek financial advice

As we look back on the 12 months since the UK first went into lockdown one thing is abundantly clear – financially, the last year has been good for some people. We’re not talking about the billionaires who have seen their shares rocket during lockdown but rather the many, many people who have saved money by not commuting, not buying lunch from the sandwich shop and not going on holiday. Depending on which paper you read, people in the UK have ‘accidently’ saved anywhere between £100bn and £125bn during lockdown. 

At the opposite end of the spectrum, lockdown has been hard for millions of people as businesses have failed, jobs have been lost and they have been forced to rely on their savings. 

In both cases there has been a need for financial planning advice. A year ago it might have been assumed that fewer people would need financial advice as a new money management or savings and investing app came out virtually every other day. 

However, according to a recent report from Prudential, the exact opposite is the case. More than half – 53% – of UK adults say that financial problems and changed circumstances over the last 12 months have caused them to seek financial advice. Of this figure, 33% have already sought financial advice, whilst the remaining 20% are planning to do so. 

For most of those responding to the survey the glass was, unfortunately, half-empty, with 85% of people saying they had concerns about the next twelve months, with the two concerns most frequently highlighted being: ‘having to use savings to make ends meet’ and ‘my investments losing money.’ 

Interestingly, the report revealed that the need for financial advice was felt most among the younger generations – Millennials and Generation Z, exactly the generations we might have assumed would shun traditional advice in favour of apps and online portals. 

Seventy-four percent of Millennials said that they had, or were going to, see a financial adviser, with 58% of Generation Z echoing those sentiments. The key drivers for these generations were ‘avoiding financial difficulties’ and ‘wanting to start [my] investment journey.’ 

Clearly the last 12 months have been difficult for everyone. What they have illustrated is that financial planning advice will always be required and that people – of whatever generation – will always value face-to-face advice (even if that has been face to Zoom advice recently…) 

Our clients can rest assured that whatever happens with the pandemic – and however long the restrictions stay in force – our commitment to providing the very best long-term financial planning advice will never waiver.

Sources
https://www.internationalinvestment.net/news/4028485/half-uk-adults-seeking-financial-advice-report

https://www.theguardian.com/business/2020/dec/07/uk-covid-savings-haldane-bank-of-england

How much should I be saving towards my pension?

Research shows that we put ambitious targets on our retirement income and then underestimate how much we need to save to get there.

Before we delve into how much you should be saving, here’s a quick overview of the two main types of pension schemes:

In a defined benefit scheme your employer promises to deliver you an income in retirement. You’ll most likely have to contribute each month too, putting in a required amount.

These ‘gold-plated’ schemes are increasingly rare.

The other type of scheme is a defined contribution scheme. If you have this type of scheme, you will save into this and get contributions from your employer too. The money is invested to build a pot which will then fund your retirement.

If you have a defined benefit scheme, you just need to save as much as your employer says. But with a defined contribution scheme things are a little more complicated… The onus is on you to deliver the money you need in retirement – the more you save, the more you get.

How much will I need in retirement?

In retirement, your outgoings are likely to be lower. For instance, most people will be mortgage free and not supporting children. In the finance industry, there’s a vague rule that some currently aged 40 would need around 50% of their current income to have the same standard of life in retirement.

You should also factor in the state pension. Under the new flat-rate scheme this is worth £155.65 per week (£8,094 per year). So, someone targeting a retirement income of £23,000 would need to contribute £16,000 from their own pensions.

How much should I be saving?

Naturally, the amount you need to save depends on the size of the pension you want. However, it also depends on your age.

For instance, putting 12% of your salary towards your pension might be enough if you start in your 20s, but if you leave it until you’re 40, you might need to pay in closer to 20% to get the same level of income.

It’s sometimes said that the rule for working out what percentage of your salary needs to be going into a pension is half the age from when you started saving. So, if you started at age 30 it would be 15%.

This said, given the variation in salaries and personal circumstances, it can be a good idea to get a slightly more profound insight into your finances. 

You could use some sort of pension calculator. There are plenty of different calculators online that let you play around with the numbers. A quick search on Google will reveal plenty. 

All things considered, this can’t give you quite as clear a view on your financial retirement scenario as speaking to an independent financial adviser. They should have the knowledge and experience to help you get both a clear view of your current situation and the changes you could make so that your money works harder towards your goals.

Sources
https://www.thisismoney.co.uk/money/howmoneyworks/article-3177112/How-money-need-save-pension.html

Why even financial planners need financial planning

You may find it surprising to learn that even financial planners use financial planners. Surely, they know it all already, don’t they? Don’t they just follow their own advice?

Let’s look at why advisers sometimes find it helpful to sit on the opposite side of the desk.    

To clarify goals 

Setting clear goals is hard, no matter who the person is! If you’re doing it on your own, it’s all too easy to set vague objectives that don’t really challenge you. After all, who will know, or care, if you reach them? You can also easily let the timeframe drift – one year, five years, never. 

Another independent professional, however, will bring your goals into sharp focus and make sure you really consider the level of risk and the possibility of failure. But they’re also likely to push you a bit and encourage you to commit to challenges that you might never have even considered if left to your own devices.     

Goals are also likely to involve other people; spouses and families. So financial planners can often welcome using someone experienced in facilitating these discussions, just as they moderate them for their clients.        

To be held accountable

Just being aware that someone is going to review your progress on a regular basis means you’re more likely to take it seriously. It’s human nature. Think back to school when you had to present something in class, or if a parents’ evening was looming. Or at work when a project is going to be analysed in a meeting.            

It’s invaluable to know that a third party is going to review your goals. Knowing you’re accountable to someone keeps you on track and helps performance. It’s also useful to know there’s someone reminding you of what you deemed important at the outset. 

To stop emotions getting in the way   

No matter how qualified an adviser may be, when it’s their own situation it can be difficult not to get too close but to stay detached. Doing the financial stuff may be relatively easy for them; it’s what they’ve trained for and become qualified in. The harder part can be making sure they don’t get emotionally involved in their own investment decisions, which is where having an independent third party can be invaluable.

Sources

https://medium.com/@behaviorgap/between-me-and-stupid-2947498ddad4

when life means life

Some people object to insurance on the principle that it may not provide any tangible benefits: an insurance policy only pays out if the event occurs that it’s designed to protect against. If your house doesn’t suffer fire, flood, subsidence or other damage, your house insurance won’t pay out. And so on.

Of course, many such policies provide peace of mind and reassurance, which surely has some value. But it must be agreed that many types of insurance never pay out. Your house may never suffer damage. And even though term assurance is a type of life assurance, if you don’t die within the period specified, it won’t pay out either.

However, there is one type of insurance guaranteed to pay out: whole of life protection. This type of life assurance runs for your whole life; and as death is unavoidable, it will pay something sooner or later.

This provides you with the peace of mind that your family won’t suffer financial stress due to your death, whenever it occurs. But this type of policy also has other uses. You can combine it with term assurance to cover particular debts. It can also be used as part of estate planning by providing money that can help with Inheritance Tax bills. It can even have value for businesses: when used as so-called key person cover, it can protect a company from the financial consequences of losing a vital employee, partner or director.

Whole of life protection comes in various forms. In essence, though, there are two types of cover: maximum and balanced cover. With maximum cover, the initial premiums and the sum insured don’t change for the first 10 years. Thereafter, the premiums may go up depending on various factors – such as the performance of the life fund in which the premiums are invested.

Balanced cover plans aim to keep the original premium level for however long the policy runs for. However, premiums still might rise if the fund doesn’t perform as well as anticipated, or if charges go up.

How much does whole of life cover cost? The premium rate depends on a number of factors: your age, how much cover you want, your sex, whether you’re a smoker, and your state of health at outset. However, because whole of life cover is guaranteed to pay out eventually, it will tend to be more expensive than term cover which might not pay out anything.

You can bolt on some extras to increase your security. One of these is critical illness cover. While life assurance only pays out on your death, critical illness plans pay their sum assured following diagnosis of a specified serious illness; and the money can be used however you want. Waiver of premium might also be worth considering: this will pay your premiums for you for a set period if you’re unable to work due to illness or accident.

As always, it’s worth discussing your circumstances with a trained and qualified financial adviser to make sure you buy the plan that best suits your needs.

it’s not about how much you have , but what you do with it…..

The old cliché goes that ‘money can’t buy you happiness,’ but how true is that statement?

According to a recent survey by Ameriprise Financial, only 13 per cent of American millionaires classified themselves as wealthy. Even those who had over $5 million (£3.8 million) spread across their accounts, investments and funds said that they didn’t feel like they were rich. 

Elizabeth Dunn, psychology professor at the University of British Columbia, said that this could be due to ‘social comparison’, meaning that a person only feels rich if he is richer than the people he is comparing himself with. A 2005 case study in Germany compared people who were similar in terms of age, education and region of residence, finding that “individuals are happier the larger their income is in comparison with the income of the reference group.”

Another more recent study in America found that those with middle-incomes were less satisfied financially if they lived in a place with higher levels of income inequality. Interestingly, research in Canada found that neighbours of lottery winners were likely to run up debts and to go bankrupt.   

But what should you make of all this? 

Elizabeth Dunn commented that people tend to overrate the importance of earnings when it comes to feeling financially satisfied. “All of this talk about ‘income, income, income’ overlooks the fact that it matters a lot what you do with your money.” Spending money in certain ways, for example on memorable experiences rather than possessions, can make people feel better.    

Maggie Germano, a financial coach in the States, notes that “people who feel the best about their financial situation […] are people who are fully aware of what their financial situation is.” She explains how she has clients who get a surprise when they realise how much they are spending on online shopping and Uber rides. “I do think it is less about how much is actually coming in and more about how they’re consciously using the money,” she emphasises.

Another financial coach, Michelle Tascoe, mentioned how setting specific goals can help to give you financial peace of mind and cause you to have a more positive outlook on your finances. Rather than just saying, ‘I want to retire early,’  a more focused goal, such as, ‘I want to retire by the time I’m 55’ will help you plan more effectively.  

From the experiences outlined, it’s been shown that taking the time to work out what you want your money to achieve will give you a greater sense of clarity. You can measure your progress against a defined plan and improve your emotional and financial wellbeing for the future.

Sources
https://www.theatlantic.com/family/archive/2019/07/who-feels-rich/594439/

https://www.nber.org/papers/w24667

What has survived from the original Pension Schemes Bill?

 You may have read various headlines about the Pensions Bill which was first announced in the Queen’s Speech in October. Its progress was subsequently halted with the calling of the General Election but it has now been confirmed by the Queen and is on its way to becoming law. 

Given all the to-ing and fro-ing, you could be forgiven for being unclear as to what it actually includes. It has, in fact, remained largely unchanged and has met with widespread cross-party support.  

The main initiatives include:

  • The introduction of the framework for pensions dashboards
  • Legislation to establish collective defined contribution (CDC) schemes
  • Greater powers for The Pensions Regulator 

The government said the purpose of the bill was to “support pension saving in the 21st century, putting the protection of people’s pensions at its heart.”

Pensions dashboards 

The long-awaited pensions dashboards are designed to allow savers to view all their lifetime savings in one place through a digital interface. Data will be retrieved directly from pension providers and updated in real time. The Pensions Bill has introduced new rules that will provide a framework so that providers will be compelled to provide accurate information. State pension data should also be visible.       

Experts warn, however, that primary legislation will take most of 2020 to reach the statute book and it could be several years before much of the older data from company and private pensions is accessible. Research has shown that 65.8% of respondents would like to use a dashboard to see how much their pension is worth and what type of income that would translate to in retirement. 54% of those surveyed, though, said they would be unlikely to use the system if it only contained partial information.

It’s clear that dashboards have the potential to revolutionise retirement planning but the industry wants to ensure early users are not put off by incomplete versions.The Bill is really only the beginning.          

Collective Defined Contribution schemes 

The Bill also announced its commitment to the creation of a ‘framework for the establishment, operation and regulation of Collective Defined Contribution (CDC) schemes.’ Currently, employers can offer either a Defined Benefit (DB) scheme or a Defined Contribution (DC) scheme but both have their disadvantages. DB schemes can present significant risks to the employer while DC schemes may give a less predictable income for scheme members. As a result, the Government has decided to offer this new type of scheme, the CDC, also known as a Collective Money Purchase scheme. 

As the name suggests, both the employer and the employee would contribute to a collective fund from which the retirement funds would be drawn. The scheme does not produce individual pension pots and the funding risk would be shared collectively by the individual investors.       

Unlike DB schemes, CDC schemes do not guarantee a certain amount in retirement. Instead, they have a target amount they will pay out, based on a long-term mixed risk investment plan. 

Greater powers for The Pensions Regulator  

The other key part of the proposed Bill is that The Pensions Regulator (TPR) will be given stronger powers to obtain the correct information about a pension scheme and its sponsoring employer in a timely manner. This will ensure it can gain redress for members when something goes wrong. Any company boss found to have committed ‘wilful or grossly reckless behaviour’ in relation to a pension scheme will be guilty of a criminal offence, which will carry a prison sentence of up to seven years.

Sources
https://www.pensionsage.com/pa/Pension-Schemes-Bill-reintroduced-in-Queens-Speech.php

https://www.pensionsage.com/pa/Over-half-of-savers-unlikely-to-use-incomplete-dashboard.php

https://www.ftadviser.com/pensions/2020/01/08/govt-s-revolutionary-pensions-bill-re-enters-parliament/

https://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-8674

Ensuring harmony after death

With an estimated 60 per cent of people dying without having made a will, it’s troubling to think that their life savings and property may not be passed on according to their wishes.

One way of guaranteeing that those closest to you are taken care of is simply by making a will.

A will ensures that your assets are shared in the way that you would like. If you’re an unmarried couple, you can make sure your partner is provided for and if divorced, you can decide whether to leave anything to your former partner.

You are never too young to make a will. An online YouGov poll undertaken by children’s charity Barnardos found that of those people who have made a will, a surprisingly savvy 61 per cent did so before the age of 41.

More than one in five (22 per cent) cited having a child as a key driver whilst almost a quarter (23 per cent) stated financial planning as the reason for writing a will.

Although it is possible to write a will yourself there are various legal formalities you need to follow to make sure that your will is valid. Importantly, employing the services of a Solicitor can ensure the process is smooth and that you don’t pay more inheritance tax than necessary.

Begin by taking some time to think about what you want to include in your will, look at how much money and what property and possessions you have. Crucially, think about whom you want to benefit from your will and who is best placed to look after your children if under the age of 18.

Also consider who you would like to sort out your estate and carry out your wishes after your death. You can appoint an executor at any time by naming them in your will.

In England, Wales and Northern Ireland, two witnesses are required to be present when a will is signed and they must have no beneficial interest as this could make it invalid.

Remember once you’ve made your will it’s important to keep it in a safe place and tell your executor, close friend or relative where it is. You should also consider reviewing it every five years and after any major change in your life – such as separation, marriage, divorce, having a child or moving house.