Running your own business can give you the opportunity to follow your passion and enjoy the ultimate flexible lifestyle. However, it does also mean taking on additional responsibilities. One of these is your pension.
Many British pensioners choose to move abroad, often in search of warmer climes and a more comfortable retirement.
The stereotypical idea of retiring abroad often involves moving to a mediterranean country. However, only one mediterranean country featured among the top 5 countries from which British expat pensioners claimed their state pension. This indicates that things might be changing…
Here are the top 5, in descending order:
5) Spain – 106,420 retirees
The Iberian nation has long been a retirement favourite for Brits, so we were surprised when it only came in fifth. The amount of British pensioners who spend much of the year in Spain is likely to be much higher, with many owning second homes whilst drawing their pension from the UK. Overall 16.7% of registered Spanish property belongs to UK citizens.
Spain is the only non-English speaking nation among the top 5. However, English is widely spoken in major cities and areas with a large number of tourists and expats, like the Costa Brava and Costa Del Sol.
4) Republic of Ireland – 132,650 retirees
Lush rolling scenery and cheap house prices outside of Dublin make the ‘Emerald Isle’ an attractive destination for British retirees. Although the weather may be a little on the damp side, its scenic countryside, dotted with stone castles and slower way of life have encouraged many to retire across the Irish sea.
The large quantity of Irish people living in the UK is also likely to be a factor, with many moving closer to their family after retiring.
3) Canada – 133,310 retirees
Great scenery, kind people and a low crime rate make Canada an ideal retirement destination. Canadians are famously welcoming, meaning settling in is very easy for retirees.
What’s more, Canada has excellent healthcare. There are no fees for medical treatment, doctors’ appointments and dental visits. Even eye tests come free of charge. It’s unsurprising that it’s just a hair behind it’s much more populous neighbour when it comes to the number British retirees settled here.
2) USA – 134,130 retirees
Despite coming in at second on our list, retiring in the US for non-citizens is tough. If you don’t have a job Stateside or a family member to sponsor you, your only option is the Green Card lottery. This is a lengthy and costly process.
All this said, the USA offers some great retirement options. Warm climates in southern areas, wild scenery and the allure of the American lifestyle can prompt Brits to retire across the pond.
1) Australia – 234,880 retirees
Warm weather, barbies on the beach and a high standard of living. It’s easy to see why Australia is the number one destination for British retirees.
However, retiring here does mean having a sizeable pension pot. Australia is a relatively expensive country, reflecting the much higher salaries people generally earn Down Under. House prices are expensive and food bills can leave you reeling.
Retiring overseas is a dream for many Brits. After all, who wouldn’t be tempted by the better climate and the amazing travel opportunities found abroad. Where you choose to spend your retirement, however, will affect how much state pension you get.
State pensions are frozen if you decide to move abroad to certain countries, such as Australia, New Zealand, Canada or India. Whilst normal state pensions rise according to the triple lock, in these countries your pension would be frozen. The triple lock means that pensions currently rise by the highest of inflation, average earnings or 2.5% Whether or not your state pension is frozen depends on whether the Government has struck individual deals with the country you move to. As it stands, the Government has only made deals with the EU, the US, Switzerland, Norway, Jamaica, Israel and the Philippines. It has been decades since any new deals have been made.
To illustrate what this freeze means, an expat who retired when the basic rate was £67.50 a week in 2000 would still get that, rather than the £125.95 received by those whose pensions have not been frozen. Likewise, if you qualify for the full state pension of £164.35 and already live in or move to one of the ‘frozen’ countries, the amount you receive will not increase while you stay abroad.
This freeze currently reduces the pensions of approximately 550,000 British pensioners.
However, upon returning to the UK, pensioners are eligible to get their state pension uprated back to the full amount by applying directly to the Department for Work and Pensions service centre.
What about Brexit?
As it stands, nothing is certain until we get a final deal (or no deal!). However, it’s likely that state pensions in the EU will not be frozen. An update on Brexit talks published jointly by the EU and UK indicated they had ‘convergence’ of their positions on state pension increases.
If you’re planning on moving to a ‘frozen’ country like Australia, it’s best to consider the implications of a frozen state pension on your finances sooner rather than later. It will be easier to mitigate the effects when you’re younger and still have greater financial ties to the UK.
There’s no reason why being a parent, and particularly being a non-earning parent with commitments to their children, should put you at risk of decreasing your state pension entitlement. Currently, however, there are potentially hundreds of thousands of people in this exact position – although thankfully, there are steps to take so that it can be avoided.
Figures supplied to the Treasury by HMRC suggest that there could be around 200,000 households missing out on these pension boosting entitlements. If the child benefits are being claimed by the household’s highest earner, and not the the lower earner or non-earner, these potential national insurance contributions can fall by the wayside. Treasury select committee chairman and MP Nicky Morgan says; “The Treasury committee has long-warned the government of the risk that for families with one earner and one non-earner, if the sole-earner claims child benefit, the non-earner, with childcare commitments forgoes National Insurance credits and potentially, therefore, their entitlement to a full future state pension.”
With 7.9 million UK households currently receiving child benefits, there is potential for a large number of people to be affected. Thanks to data from the Department for Work and Pensions, it’s suspected that around 3% of those (around 200,000) may be in this situation. It’s worth noting that the family resources survey covered 19,000 UK households and as the estimate is sample-based, there is some uncertainty on the exact numbers of those at risk. Nicky Morgan continues, “Now that we have an idea of the scale of this problem, the Government needs to pull its finger out and make sure that people are aware of the issue and know how to put it right.”
From the Adviser-Store
From January 9 2019, the cold-calling of savers about anything to do with their pensions became illegal. The new law doesn’t just cover phone calls. Any unsolicited emails or text messages about your pension will also be illegal.
As it stands, not every cold-call you receive about your pension is a scam, though many scammers use it as a tactic to get their hands on your retirement savings.
When the ban comes into force, you can be sure that any out-of-the-blue call about your retirement savings is definitely a scam.
The introduction of pensions freedoms in 2015 is widely cited as the reason for the alarming increase in pension fraud over the last few years. Scammers have seized upon these rules, which give savers much more flexible access to their retirement savings, to get unsuspecting individuals to transfer their cash.
Key warning signs of pensions scams include offers of free pension reviews and promises of incredibly high rates of return, among others. Citizens Advice report that as many as 10.9 million people were cold-called about their pensions in 2016 alone.
In the wake of this rise in scamming, savers have been turning to financial watchdogs in huge numbers for help. Between August and October last year more than 173,000 people visited the FCA’s ScamSmart website for more information.
Pension fraud victims lost £23 million in the last year alone, up £9.2 million from the year before. The real amount could be even higher as only a minority of victims report being scammed.
From 9th January, when you put the phone down on would-be pension scammers, you can tell them that they have broken the law just by contacting you.
If you suspect you have been victim to a pension scam, you should report the scam or fraud to Action Fraud as soon as you can. They will pass the information to the National Fraud Intelligence Bureau who will analyse the case to find viable lines of enquiry. If they find any, they will send the report to the police for investigation.
Pension drawdown in an era of long life expectancies
Retirement planning means taking into account a whole host of factors. You have to navigate tough questions like, ‘What will the impact of inflation be?’ or ‘When will interest rates start to creep up?’
As well as these, there is another question that must be considered: ‘How long will you live?’
This question is unanswerable but figures suggest that some pensioners might be getting this figure very wrong when it comes to drawdown. Many are running the risk that their retirement pot kicks the bucket before they do.
Research by AJ Bell indicates that 50% of people aged 55-59 who’ve entered income drawdown say they have only enough savings to tide them over for 20 years. This might sound like a long time but when you consider that average life expectancy for this cohort of savers is 82 for men and 85 for women, many risk running out of money.
The reality is that none of us know how long we will live. When you factor in that there’s a fair chance that a few of AJ Bell’s respondents might live to 90 or even 100, it’s clear that many pensioners could be drawing from their savings at an unsustainable rate.
AJ Bell also asked their respondents about their withdrawal rates. They discovered that 57% of people in the 55 to 59 age bracket are withdrawing more than 10% of their fund each year. This reduces to 43% of people in the 60 to 64 age bracket and 34% of people in the 65 to 69 age bracket.
While many use their early retirement to travel and embark on their larger plans, over-withdrawing early on could mean that they end up without the money to cover costs that arise in later life, such as care costs.
The average size of the fund in AJ Bell’s questionnaire was £118,000. Based on this, a 10% annual withdrawal of £11,800 would result in the income lasting just 12 years. However, if the withdrawal is reduced to 6% of starting value, the same fund might last for 29 years. These estimations don’t take into account the detrimental impact of inflation, which currently runs at 2.7%.
Working out a sustainable drawdown rate is difficult and depends on a whole range of factors. Your regulated financial adviser or planner should be able to give you your best chance of a good retirement outcome.
In the UK, we are faced with the challenge of an ageing population. Many of us will live longer than we might have expected. Already, 2.4% of the population is aged over 85. Because of improvements in healthcare and nutrition, this figure only looks set to rise.
The Office of National Statistics currently estimates that 10.1% of men and 14.8% of women born in 1981 will live to 100. A demographic shift to an older population brings unprecedented change to the way the country would operate, from the healthcare system to the world of work.
In addition, a long life and subsequently a long retirement, bring challenges of their own from a personal financial planning perspective.
Firstly, it means you have to sustain yourself from your retirement ‘nest egg’ of cash savings, investments and pensions. You need to ensure that you draw from this at a sustainable rate so you don’t run the risk of outliving your money.
Secondly, there’s the question of funding long term care. If we live longer, the chance that we will one day need to fund some sort of care increases. Alzheimer’s Research UK report that the risk of developing dementia rises from one in 14 over the age of 65 to one in six over the age of 80.
Of course, there are many different types of care, ranging from full time care to occasional care at home, with a variety of cost levels. All require some level of personal funding.
The amount you pay depends on the level of need and the amount of assets you have, with your local council funding the rest. This means that it’s definitely something that you need to take into account in your financial planning.
Having the income in later life to sustain long term care really does require detailed planning. Because of the widespread shift from annuities to drawdown, working out a sustainable rate at which to withdraw from your ‘nest egg’ is essential.
There is no ‘one-size-fits-all’ sustainable rate at which to draw from your pensions and savings. Every person has their own requirements, savings, liabilities and views on what risks are acceptable.
There are some things which you will be able to more accurately plan when working out the sustainable rate to draw from your pension. These include your portfolio asset allocation, the impact of fees and charges and the risk level of your investments. Speaking with your financial adviser will help you on your way to working out the right withdrawal rate for you.
There are, however, some unknowns. These include the chance of developing a health condition later in life and exactly how long you’ll live. It is best to withdraw leaving plenty of room for these to change unexpectedly, improving your chances of having a financial cushion to cope with what life throws at you.
Nonetheless, if you can afford it, putting money aside in to a pension for your children or grandchildren can be a sensible option.
Under the current rules, you can put £2,880 a year into a junior self-invested personal pension (SIPP) or stakeholder pension, on their behalf. Even though the child won’t be a taxpayer, 20% is added to the amount in tax relief, up to £3,600 per annum. If you think about it, that can result in quite a significant amount over the years, taking compound growth into consideration.
The idea of contributing to a pension may tie in well with your sense of responsibility towards the next generation. You may feel sorry for the youngsters of today with their university fees to pay back and a seemingly impossible property ladder to climb.
However, on the downside a children’s pension can be quite frustrating for the recipient. The money is tied up until their mid fifties. This means that although the amount is steadily growing with no temptation to dip into it, it may not be much consolation for a twenty-five year old desperately trying to find the deposit for a house. Instead of making their financial future easier, you may have, in fact, impeded it.
There are other alternatives which will also give you the benefit of compound growth and help you to maximise tax relief, such as using our own ISA allowances and then gifting the money later. These may have more direct impact if the money is to help pay for a wedding, repay a student loan or enable them to buy a house or start a business.
Pension contributions are often referred to as ‘free money’ because of the the tax relief. In addition, 25% of the lump sum when the recipient comes to take their pension is tax free but it is equally important to remember that 75% of any withdrawals will be taxable. Another consideration is that children’s pensions have the lowest rate of tax relief but once in employment, your children may be higher rate taxpayers so would have benefited from higher rate relief.
One thing is for sure and that is that the rules around pensions and withdrawal rates are frequently changing. Given the extended timeframe involved, it’s likely that the regulations around accessing a pension pot will have altered considerably by the time a child of today reaches pension age. Their fund will have had time to grow handsomely, though. As with most things, it all comes down to a question of personal preference for you and your family.
It should be an exciting decade, full of plans and aspirations. It’s also likely to be a time of optimum earning potential.
What’s more, it’s a crucial decade to take a step back and make sure your finances are on track to meet your goals.
There’ll be some decisions you’ll already have taken in your twenties or thirties, which will have had an impact. You may have bought your own home, for example, or put some savings away in cash, investments or pensions.
If things don’t look quite as rosy as you’d hoped, though, your forties are a good time to take stock, as there’s still time to make adjustments and give your investments time to grow.
Don’t forget, whatever savings you can make now will enable you to pursue your dreams later on.
Here are four key tips for shrewd financial planning at this important time of life.
Just because life may feel comfortable with regular pay rises and bonuses don’t fall into the temptation of spending more than you need. Do you really need that Costa coffee or M&S lunch every day?
Apps like Money Dashboard or Moneyhub can be helpful in showing you where your money’s going. Simple steps like cancelling subscriptions or switching bill providers can make a significant difference.
Historic studies show that investments usually outperform cash savings so any disposable income you can invest will be beneficial. If you can put money aside in a pension you’ll also be taking advantage of the tax relief available. Make sure you use your ISA allowance too for more accessible funds.
Carry out a protection audit
Think about what if the unexpected happened. Your forties are a time of life where you may find yourself part of what’s known as ‘the sandwich generation’ i.e. caring for elderly parents at the same time as looking after young children. This can put extra pressure on you. Make sure you’re protected should the worst happen by ensuring you have a good emergency fund in place. Also think about critical illness cover and life insurance.
Your home will be a fundamental part of your financial planning at this time of life. If you feel you need a larger property, these are likely to be your peak earning years so now is the time to secure the best mortgage you can and find your dream home. On the other hand, if you’re quite happy where you are, it may be a good time to remortgage to get a better deal.
Everyone’s situation is different. You may have children at university or you may still be having to pay for nursery fees. Whatever your position, make sure you budget accordingly and allow for inflation, especially if you’re paying private school fees. Work out the priorities for your family – the best education now or a house deposit in the future. It’s important not to derail your own life savings for the sake of your children as no one will benefit in the long run.
By doing some sound financial planning now, you’ll have more hope of continuing in the style you want to live, well beyond your forties.
Keeping track of your pension can be difficult at the best of times, and if you have multiple pots it can seem nigh on impossible. Fortunately, we have some top tips to help.
First introduced in 2012, auto-enrolment made it compulsory for UK employers to automatically enroll their staff into a pension scheme, unless they opt out.
However, according to financial services firm Hargreave Lansdown, £600 million is being lost from this scheme each year.
This is because every time you change employer, you receive a new pension pot. Each time you start a new pension pot, you are charged between £20 and £80 in administrative fees. With the average worker changing jobs 11 times, over the course of a lifetime that adds up to a substantial sum.
Luckily, there are some simple steps you can take to avoid these extra charges and make sure that you are up to date with all your pension pots:
- Avoid having more pension pots than necessary. If you change employers, see if you can transfer your old pension across to the scheme in your new workplace. Sometimes employers will be happy to make contributions to your existing pension pot. If so, you can keep that one going and avoid any extra charges.
- Be mindful of where your money is. Never take for granted that the default fund your employer provides is the best one for you. It is important to see if your hard earned pension pot could be growing more elsewhere. There’s a chance you might be able to stake out a pension fund with fewer charges or a better investment return than your employer’s default pot.
- Remember to notify pension companies if you move house. If you have multiple pension pots, it is easier than you think to lose track of a pension fund, especially if the company can no longer contact you.
- Use the government’s pension pot finding service. Luckily, the government has an online service that allows you to find contact details for your own workplace or personal pension scheme. You can access this here.
- Check back through your paperwork. The majority of pension providers send an annual statement that includes the current balance of your pension, plus a projection of how much your pension will be worth when you reach retirement age. There’s a chance you might have held onto these and they may be lurking at the bottom of your filing cabinet. When you find the right document, you can contact the pension provider to update your details.
- Get in touch with your old employers. If you think you have lost a pension pot, get in touch with your old employers straight away. They should be able to help you find the details of any lost pension.
Keeping track of your pensions can, at times, feel overwhelming. We hope that our pension top tips help you manage your pensions and maybe even save you some money.