Category: Pension

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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.

Drawdown tax and flexible retirement income. What does it all mean?

Once you reach 55, a whole spread of opportunities will open themselves up to you. One such bonus is the fact that you can finally access that hard-saved pension fund. Up to 25% of your savings can be taken tax-free, with the remaining 75% being subject to income tax. The payable amount depends on your total income for the year and your tax rate. This is known as drawdown tax. 

You’ll only have to pay tax if you decide to draw over the 25% threshold. In this case, any income you take will be added to the rest of your taxable income for that year, and will be taxed at 20% after you pass the personal threshold. Therefore, if you were to take out a large withdrawal pushing you into the £40,000 to £150,000 bracket, you could be taxed at 40%. 

Your pension provider is required to deduct any tax before a withdrawal is paid and it’s likely that when you take a taxable payment for the first time, you’ll be taxed using an emergency tax code (it may be worth speaking to your pension provider about how you will be taxed). 

How do you manage your pot? 

If you choose to stay within the 25% lump sum, more often than not you’ll move the rest into one or more funds that allow you to take a taxable income at times to suit you. It’s wise to choose funds that match your income objectives and your attitude to risk, as the income you receive might be adjusted periodically depending on how well your investments are doing. 

You can also move your pension pot gradually into income drawdown. The 25% bracket still applies to each amount you move across, so you can take a quarter of the amount tax-free and place the rest into drawdown. 

A way to make your retirement income more flexible is to invest in an annuity or another type of income product, such as a gilt or corporate bond, which usually offer guarantees about growth and income. 

However, it’s paramount that you carefully plan how much income you can afford to take under pension drawdown as you don’t want to run out of money. Factors such as living longer than expected, taking too much out too early and poor investment performance can potentially hinder your drawdown plans. 

That’s why it’s important to regularly review your investments.

Sources
https://www.pensionbee.com/pensions-explained/pension-withdrawal/how-does-pension-drawdown-tax-work
https://www.moneyadviceservice.org.uk/en/articles/flexi-access-drawdown
https://blog.standardlife.co.uk/combiningyourpensions-2/

Defined Contribution vs Defined Benefit – what’s the difference and what’s the trend?

As defined contribution pension plans overtake defined benefit (in terms of money paid into schemes) for the first time ever, more and more people are taking an interest in how the two differ and the relationship between them. The Office of National Statistics (ONS) has reported that in 2018, employee contributions for defined contribution pension pots reached £4.1bn, compared to the £3.2bn that employees contributed to DB schemes.

With April 2019’s increase to minimum contributions for DC schemes seeing employer contribution hitting 3% and employees contributing 5% towards their pension, the trend of DC contribution increases in relation to DB isn’t set to slow any time soon.

So before DB Pensions become a distant memory, let’s take a look at exactly what they are. A defined benefit pension, which is sometimes referred to as a final salary pension scheme, promises to pay a guaranteed income to the scheme holder, for life, once they reach the age of retirement set by the scheme. Generally, the payout is based on an accrual rate; a fraction of the member’s terminal earnings (or final salary), which is then multiplied by the number of years the employee has been a scheme member.

A DB scheme is different from a DC scheme in that your payout is calculated by the contributions made to it by both yourself and your employer, and is dependent on how those contributions perform as an investment and the decisions you make upon retirement. The fund, made of contributions that the scheme member and their employer make, is usually invested in stocks and shares while the scheme member works. There is a level of risk, as with any investments, but the goal is to see the fund grow.

Upon retirement, the scheme member has a decision to make with how they access their pension. They can take their whole pension as a lump sum, with 25% being free from tax. They can take lump sums from their pension as and when they wish. They can take 25% of their pension tax free, receiving the remainder as regular taxable income for as long as it lasts, or they can take the 25% and convert the rest into an annuity.

One of the reasons for DB schemes becoming more scarce is that higher life expectancies mean employers face higher unpredictability and thus riskier, more expensive pensions. This is a trend that looks likely to continue. If you’re unsure of how to make the most of your pension plan, it’s recommended to consult with a professional.

Sources
https://businessnewswales.com/defined-contribution-pensions-overtake-defined-benefit-for-the-first-time-ever/ https://www.moneyadviceservice.org.uk/en/articles/defined-contribution-pension-schemes https://www.pensionsauthority.ie/en/LifeCycle/Private_pensions/Final_salary_defined_benefit_schemes/
https://www.moneywise.co.uk/pensions/managing-your-pension/your-guide-to-final-salary-pensions

6 bad habits to avoid during retirement

Planning for retirement can be complicated, as anyone approaching the end of their working life will tell you. However, navigating the myriad of choices, both financially and socially, doesn’t have to be such an enigma. Here are a few tips to help you avoid common bad habits that retirees often fall into:

1. Spending your pension fund money

Yes, that’s right. If you delay spending your pension and spend other available cash and investments first, you could keep your money safe from the taxman. Not spending your pension fund money until you have to may also help the beneficiaries of your estate avoid a large inheritance tax bill.

2. Taking the full brunt of inheritance tax

Inheritance tax can cost your loved ones vast sums if you were to pass away. There are plenty of ways to protect them from losing a large portion of your estate. Strategies such as making gifts or leaving assets to your spouse are an effective way to avoid the tax, among other valuable strategies.

3. Failing to have a plan

Many retirees have multiple avenues of income to provide for them during retirement. Making the most out of those streams of revenue is key to a stress free retirement, as unwise investment or poor planning can lead to unnecessary worries. We recommend contacting a financial adviser in order to set out a plan that’ll let you focus less on worrying about income and more on enjoying your well-earned retirement.

4. Not taking advantage of the discounts

There is an absolute boatload of price slashes available to retirees over a certain age. This ranges from discounts on train fares to reduced prices of cinema tickets. We recommend that all pensioners takes full advantage of these discounts as every penny saved provides more financial security for yourself and your loved ones.

5. Thinking property is the only asset worth having

Property can be a valuable source of retirement revenue, but it’s not the only way to create more income. Property can often incur maintenance expenses for landlords and take up time to resolve that could be spent making the most out of your retirement (though there are many pros and cons to the pension vs property discussion).

6. Buying into scams

When you retire, it seems that all kinds of people come crawling out of the woodwork to give you a “great” investment opportunity or insurance policy. Tactics can include contact out of the blue with promises of high / guaranteed returns and pressure to act quickly. The pensions regulator has a comprehensive pensions scam guide that’s definitely worth a read.

Building your financial future

Sources
https://moneytothemasses.com/saving-for-your-future/pensions/buying-property-with-your-pension-everything-you-need-to-know
https://finance.yahoo.com/news/15-things-not-retirement-090000553.html
https://miafinancialadvice.co.uk/14-retirement-planning-mistakes-that-you-dont-know-that-you-are-making/
https://miafinancialadvice.co.uk/spend-your-pension-last/
https://www.investorschronicle.co.uk/managing-your-money/2018/10/04/want-an-easy-retirement-avoid-this-common-mistake/

Going Dutch: Could this new type of pension be the answer to the pension problem

Work and Pensions Secretary Amber Rudd has given the go-ahead for Dutch-style pension schemes to be offered to UK employees. These schemes, known as CDC, are a ‘halfway house’ between defined contribution and ‘gold-plated’ defined benefit schemes.

CDC stands for collective defined contribution schemes. They are similar to defined contribution pensions in that employer and employee make a regular contribution to a savings pot. Unlike defined contribution schemes, however, savers pool their money into a collective fund, rather than having their individual accounts. The idea behind this being that risks are shared evenly by all.

What’s more, CDC pensions give their members a ‘target’ income for life. Instead of a guaranteed income, CDC pensions say they’ll pay out a ‘target’ amount, based on a long-term mixed-risk investment strategy. This amount can change – it can fall in the event of circumstances like adverse economic conditions – or rise if the assets are particularly well invested.

Risk is shared by employers making changes to the amount they put in. When markets are down, pension payments can be reduced and contributions may be increased. Also, CDC funds can take a more balanced approach to investment risk rather than moving an individual pot into low-risk bonds as the retirement date approaches, as can happen with ordinary defined contribution pensions.

Critics argue that CDC pensions will be too hard to marry with the high level of control we have after the introduction of pensions freedoms in the UK. You wouldn’t be able to transfer out and buy an enhanced annuity if you had a low life-expectancy, as you would in a defined contribution scheme.

This scheme will be offered to Royal Mail workers first. They have strong support from the Communications Workers Union to go ahead with the scheme for its 140,000 members, though getting the scheme up and running might take a long time.

Sources
https://www.personneltoday.com/hr/cdc-pensions-collective-defined-contribution-pensions-cdc-dutch-style-defined-ambition-pensions/
https://moneyweek.com/498182/cdc-pensions-a-third-way/

A guide to self-employed pensions

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.