Category: Pension

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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

Will triple lock state pensions survive the current economic crisis?

The Covid-19 pandemic has dealt a crippling blow to the British economy. The latest predictions from the Office for Budget Responsibility say that the country is on track to see the largest economic decline for 300 years, with output falling by at least 10% over 2020. While the long term economic outlook is uncertain, the various economic support measures announced by the government will go some way to protecting it. For instance, the job retention scheme, where the government paid the wages of 6.3 million people, should prevent some of the fallout that would be caused by large scale mass unemployment.

However, all this needs to be paid for. For the first time in 50 years, government debt exceeds the size of the economy. Income from tax, National Insurance and VAT has plummeted while government spending has soared.

All this means that the state pensions triple lock could again come under the microscope. Under the triple lock system, state pension payments rise by the higher of inflation, wages or 2.5% each year. This policy has been a central part of the government’s commitment to pensioners over the last ten years.

Recently, experts have been increasingly vocal in their opinion that the triple lock will have to be abandoned in order to pay for the fallout of the lockdown. The Social Market Foundation think tank advised the government to scrap the triple lock system, calling for a double lock system where the state pension would rise in line with either average earnings or inflation. The think tank estimates that this would contribute to £20bn worth of savings over the next five years.

An added concern is that following this year’s fall in average earnings – predicted to be 7.3% – average  earnings could then soar next year in the event of a sharp recovery. One estimate places this figure at over 18%. This figure would form the basis of the earnings element of the triple lock system for 2021 and 2022, meaning that state pensions could rise by over 21% in just two years. 

This kind of increase would be unsustainable, especially given the severe hardship that millions of workers will face over the next few years.

However, the triple lock pension scheme was a key part of Johnson’s manifesto, a commitment he reaffirmed in parliament back in May.

What’s more, there are some models of the country’s economic recovery which show a more restrained recovery than the one mentioned above. 

Under the Office for Budget Responsibility’s latest prediction for a “moderate” recovery, the triple lock would only see earnings rise by 5% next year, meaning that state pensions would also rise by 5%. This is a far more prudent figure than 18%, meaning Johnson could still find traction to stick with his triple lock pledge. 

Sources

https://www.moneyobserver.com/news/state-pension-triple-lock-revised-forecasts-suggest-stay-execution

https://www.bbc.co.uk/news/business-53104734

https://citywire.co.uk/new-model-adviser/news/triple-lock-bill-could-hit-20bn-as-gov-t-grapples-with-finances/a1367917

What questions should you be asking before you access your pension?

According to HMRC, record numbers of people have been taking money out of their pensions since the beginning of the year. 348,000 people made a withdrawal between January and March, a 23% increase from 284,000 in the same quarter in 2019. The value of the payments was £2.46bn, the highest amount recorded for that period since pension freedoms began in 2015. 

Given these uncertain times, you too may be considering accessing your pension to increase your disposable income and ease any financial pressures. The rules allow you to take out as much as you want from your pot, once you reach the age of 55. The first 25% withdrawal is tax-free while the remaining 75% is subject to your marginal rate of income tax.  

However, just because the freedoms are there doesn’t mean taking them is the right course of action. Here are some key considerations: 

Are there any other savings you can use before you tap into your pension?    

Accessing your pension is a major step. Make sure you’ve explored all your other options first. Have you accessed any government grants that you may be eligible for first? Have you got any other cash savings that could tide you over?   

Remember that if you have a defined contribution pension, a significant proportion of it will probably have been invested in stocks and shares, which will have taken a hit in recent months. So if you access cash from your pension during the current downfall, that money won’t have the opportunity to regain its value once the stock markets recover.     

How much do you really need? 

The purpose of a pension is to give you enough money to live off throughout your retirement. Whatever you take out now will influence what you have to live off in later life. That’s why it’s a good idea to try and leave as much as you can in your pension so that it has the opportunity to benefit from future market rises.  

Most people take the whole of their 25% tax-free lump sum when they first access their pension. But you can take out money from your pension in stages, in line with what you actually need. This way you have a smaller tax-free lump sum at the outset but further tax-free entitlements throughout your retirement. It’s important to seek advice as to what is best for your personal circumstances.     

How much tax will you pay?

It’s worth being aware that by taking a large amount of your pension in a particular tax year     you could be tipping yourself into a higher tax bracket, meaning you will pay more tax than you would have done if you’d taken smaller amounts over a longer time.  

Another consideration is that HMRC will ask your pension provider to deduct income tax when you take an income from your pension pot for the first time (not counting your tax-free lump sum). They will assume that what you take the first month is what you will take every month, which could again push you into the higher bracket. If you haven’t been taking that every month and are a basic rate taxpayer, you can claim the extra tax back.        

Want to continue to pay into your pension in the future?

You may just be focused on accessing some funds for your current circumstances. It’s important to realise, however, that if what you take now is above the tax-free limit, you could be restricting how much you and your employer will be able to contribute to your pension fund in the future. According to the Money Purchase Annual Allowance, your joint contributions cannot exceed £4,000 a year without incurring penalties.           

If you’re considering accessing your pension, do get in touch with us to discuss the implications.    

Sources
https://www.yourmoney.com/retirement/aged-55-or-over-questions-you-should-ask-before-accessing-your-pension/
https://yourmoney.com/saving-banking/savings-market-awash-with-pension-freedoms-cash/

What is a Self-Invested Personal pension?

Self-Invested Personal Pensions (SIPPs) are designed to give you greater control over your retirement savings. With a SIPP you can choose from a wide range of high quality investments, manage them for yourself and consolidate your existing pensions in one place.

A SIPP is different to other pension saving forms and can give you more control over your pension through a provider with a wide range of funds and the flexibility to manage your own investments.

SIPPs are not suitable for everyone. If you don’t want to invest across different asset classes or don’t think you will make use of the investment choices that SIPPs give you then a SIPP might not be right for you. Self-directed investors should regularly review their SIPP portfolio, or seek professional advice from an independent financial adviser, to ensure that the underlying investments remain in line with their pension objectives. Prevailing tax rates and the availability of tax reliefs are dependent on your individual circumstances and are subject to change.

While SIPPs are definitely suited to investors keen to look after their own money, you don’t have to be confident with or interested in investing. You can still benefit from financial planning and investment management services, so you can usually have as much or as little involvement as you like with your SIPP.

Self-Invested Personal Pensions are described by providers as right for people who want the freedom to choose and manage their own retirement investments. SIPPs are often thought of as pensions specifically for people with a lot of money or investing experience and whilst this might have been true in the past, competition between SIPP providers means costs have generally decreased and some SIPPs are now promoted by providers to be amongst the best value pensions around. You should investigate costs carefully before choosing, however, and always seek independent financial advice if you are unsure.

Sources

www.bestinvest.co.uk

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

Can I afford to retire?

Retirement has often been described as “the longest holiday of your life.” But attractive as that sounds, can you afford to pay for the holiday?

Research by one leading insurance company shows that 69% of people over the age of 50 are concerned about their income in retirement.

Many people underestimate how much income they will need when they retire. If you’ve been used to having two cars, going on foreign holidays and eating out then it is unlikely that you’ll want to give those up simply because you’ve stopped work. In fact, many people find that their need for income actually increases when they retire. After all, if you’re behind a desk all day, the only money you’ll spend will probably be on a sandwich at lunchtime. Contrast this with how much you spend on a day off.

As worries about income in retirement increase, so do people opting to keep working after their normal retirement date.

Many people who have their own business argue that “my business is my pension.” Again, that works well in theory – but it assumes that you can sell the business for the price you want at exactly the time you want. With technology changing ever more quickly and more and more businesses losing market share to the internet, relying on your business to fund your retirement can be a high risk strategy.

More than any other aspect of financial planning, your retirement demands careful consideration. From checking on your likely state pension to tracking down any previous pensions you might have to making sure you’re contributing sufficient to your current pension – retirement planning needs to be done thoroughly and reviewed regularly.

How the gender gap even affects children’s pensions

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.

Sources
https://www.ftadviser.com/pensions/2019/10/04/gender-pension-gap-seen-among-kids/

https://citywire.co.uk/new-model-adviser/news/gender-pensions-gap-begins-at-birth/a1277113

4 steps to keeping track of your pension

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.

Sources
http://www.independent.co.uk/money/modern-careers-risk-billions-in-lost-retirement-savings-a7545091.html

The generation gap in savings might be wider than you think…….

A new report by Scottish Widows (SW) has found that savings habits among younger people are rather lacking when compared with older generations. 

14% of people aged 20-29 are not saving any money, whereas 20% are saving between 0-6% of their wages and 26% are saving between 6-12%. That leaves only 40% of people between the ages of 20 and 29 making what SW deems to be ‘adequate’ savings (12% and upwards). 

The figures differ for those over 30 where 59% of savers are saving adequately. 

Scottish Widows outlines that the central problem with savings in the UK is that people simply aren’t saving enough. This could be attributed to the decline in defined benefit pension schemes and wider economic challenges. Though progress has been made, with record highs in the adequate savings category, according to SW, this is still not enough. 

The lower level of savings among younger people is likely to be a reflection of differences in priorities. SW’s study found that 45% of younger savers (under 30s), the highest of any age group, are saving towards medium-term goals such as buying a house. 27% were found to be saving for the long term and 28% were saving for rainy days. 

SW notes that the savings gap for young people “is perhaps unsurprising but nonetheless worrying.” Those under 30 are at a time where long-term saving can be hardest, yet investment growth can be advantageous. SW outlines how younger people are missing out on “the power of compound growth.“ 

They later go on to present four interlocking issues that have led to this general lack of savings made by younger generations:

  • Most people remain disengaged with long-term savings – 38% of people are not aware how much they are saving 
  • Financial pressures – 28% of individuals earning between £10,000 – £20,000 say they’re not saving at all
  • Self-employed individuals are being left behind – 41% of the self-employed aren’t saving at all
  • Home ownership is a struggle for young people – 56% of 20-29 year olds say they have not saved for a deposit

Scottish Widows then set out a number of reforms that would benefit savers: 

  1. Raise pension contribution rates – a new level of 15% to give people a chance to maintain their quality of life during retirement
  2. More flexibility between pensions and property – including the ability to use some retirement savings to help with the purchase of their first property
  3. Create better education and guidance – which includes information on the role of property and pensions in retirement
  4. Provide a hardship facility – allowing some savings to be used to avoid problem debt
  5. Ensure the self-employed have access to similar benefits as those in employment

Though there are marked improvements from last year’s report, it seems there is still a long way to go in terms of saving habits in younger individuals. As suggested above, there may even be a requirement for governmental reform in order to achieve the goals that Scottish Widows have set out.

Sources
https://adviser.scottishwidows.co.uk/assets/literature/docs/56868.pdf?utm_source=1034930&utm_medium=paid+social&utm_campaign=22953005&utm_content=250845013&utm_creative=118592721

Five Million pension savers at risk of falling prey to scammers

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.