Category: Retirement

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Retirement planning in the time of coronavirus

The COVID-19 outbreak has signalled the dawn of a worrying time for everyone. As well as anxiety about our own health and the wellbeing of our loved ones, many of us are understandably worried about the financial future. Recent stock market turbulence is concerning for all investors, but particularly for those who are in defined contribution pension schemes and looking to retire in the near future.

The important thing is not to panic. Although we are in very uncertain times, reckless actions could severely endanger our financial wellbeing in the future. Here are some things you should consider if you’re planning to retire in the next few years:

Don’t cash out suddenly

Cashing out in a panic could severely damage your financial security in retirement. Although no one knows when the markets will recover, selling now could mean that you are taking your pension at the bottom of the market. It’s likely that financial markets will regain their strength over a period of time, even if we don’t know how long this could take.

What’s more, cashing out will mean that you’re likely to end up paying lots of unnecessary tax. In most cases, only the first 25% of a defined contribution is tax free; the rest is taxed as income. Chances are you’ll end up with a gigantic tax bill.

Remember that pensions aren’t the only form of retirement income

Retirees frequently use other assets such as cash ISAs, cash savings and rental income to provide for their life in retirement. If you have any other assets, you could use these to fund the first few years of your retirement in order to give your pension time to recover. The benefit of this would be that you wouldn’t be drawing from your pension pot when the markets are low.

If you don’t have any other assets to fund your retirement, you could consider delaying your retirement or working part time for a period. Hopefully, this would allow the markets time to recover, giving you more confidence when you finally do leave the workforce. 

Watch out for scams

Unfortunately, some unscrupulous people see times where people feel financially vulnerable as an opportunity to exploit them. There has been a lot of fraud since the start of lockdown and it has been reported that people are being scammed through being sold non-existent pension plans. 

Whatever you’re planning to do with your pension savings, it’s vital to check that the company you’re planning to use is registered with the FCA. Keep on your toes and if you see anything that looks too good to be true, it probably is.

Sources

https://www.moneyobserver.com/retirement-tips-time-coronavirus

https://broradio.fm/sky-news/fraud-victims-have-lost-more-than-4-6m-to-coronavirus-related-scams-during-the-lockdown/

Rethinking what’s important

The time in lockdown has given people the opportunity to reflect on what’s really important to them. It’s been a time to re-evaluate priorities and think about resetting goals for the future.

What about you? 

What have you missed?     

  • Has it made you want to spend more time with family and friends? 
  • Are there places you’ve decided you really want to visit when you can? 
  • Have you realised how much you appreciate being able to get out in the fresh air?  
  • Have you missed eating out? Or have you quite enjoyed doing more cooking at home? 
  • Have you rekindled a passion for an old hobby or taken up a new one?
  • Have you enjoyed the slower pace of life?  

In some respects, the lockdown may have given you a taste of what retirement might be like. Admittedly, the “stay at home” policy has been a mandate whereas retirement is a choice but nonetheless there will have been distinct similarities:

  • You’ll suddenly have had more free time on your hands (even if you’ve still been working from home, you’ll have gained back your commuting time) 
  • You’ll have been spending more time at home than ever before
  • You’ll have had to think creatively how to fill that time
  • You’ll have had to work out how to replace the social buzz of being at work  

The way you have decided to fill the time in lockdown may have revealed something about yourself and your priorities. It may be that the break from routine and going into work each day has been quite liberating. Or you may have realised that staying at home every day is definitely not for you.

Whichever camp you’re in, it may have got you thinking about your options regarding work in the future – working from home more, part-time hours, consultancy? If you’d always thought you might be bored in retirement but have actually managed to entertain yourself quite easily in isolation, the thought of early retirement might be starting to seem quite attractive. 

Many people fear retiring early because they think they won’t have enough money to live off without a salary. The lockdown experience, however, may have shown you just how much less you spend when you stay at home for a few weeks. You may have realised you don’t actually need as much financially as you thought you did. You may have got used to budgeting carefully and limiting your activities. You may have realised that you could live quite comfortably off a fixed income, just as if you were living off a pension, and your savings. 

Whatever your long-term decisions, treat this time of lockdown as a mini trial run for retirement. Use it to contemplate how your priorities might have shifted.Think about which goals you might want to re-set.

Sources

https://www.forbes.com/sites/chriscarosa/2020/04/19/will-coronavirus-quarantine-convince-you-to-retire-early/#7a6f863b8724

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’s a Rio Mortgage?

Sadly, this type of mortgage won’t help you jet off and buy a pad in Rio de Janeiro. It can, however, be a useful option to provide you with more flexibility in later years.      

A RIO mortgage stands for ‘retirement interest-only’. It’s valid for people over 60 who are keen to release some equity from their home. With this type of mortgage, the borrower only makes  monthly interest payments until they die or go into long term care, at which point the lender will get their loan repaid by the house being sold.

It allows the homeowner to remortgage their existing loan under similar terms to their current agreement. So if you’re on a pension income, the fact that you’d only have to repay the interest can make it an attractive proposition. If there’s any value left in the house once the property is sold and the mortgage repaid, that would become part of your estate.

RIO mortgages are relatively new on the market. They came about in March 2018 when the FCA relaxed their rules and separated them from equity release, by re-classifying them as standard mortgages rather than lifetime mortgages. 

The FCA wanted to make ‘affordable borrowing’ more widely available to an older population as long as they had a steady income.Take up of the new mortgage was initially slow but it has been growing in popularity. It’s simpler than equity release, offers an attractive alternative to downsizing and also means the interest isn’t racking up.  

Despite being called RIO or interest-only, some lenders are also offering an option where the borrower can repay part of the capital as well, which means they can leave more of an inheritance to their loved ones. Other providers are offering set repayment dates.

When are RIO mortgages suitable? 

A RIO mortgage can be worth considering if you are reaching the end of a standard interest-only mortgage in retirement and are concerned about how to repay the loan due to a shortfall in your savings. Rather than having to consider a house sale or expensive loan repayments, it offers flexibility and stability.            

This type of mortgage also provides an effective way of managing intergenerational wealth as it can enable you to help younger members of the family buy their first home. In addition, it can act as a means of reducing any inheritance tax burden.   

Points to consider

On the plus side, the monthly repayments on a RIO mortgage are likely to be cheaper than with   alternative repayment mortgages. It also provides a way you can stay in your own home without the worry of repaying the capital sum during your retirement. 

However, you will have to pass an affordability check to show you can afford the interest-only repayments. Bear in mind that it may be difficult to subsequently change mortgage provider or move house. You would also not be protected from short-term dips in the housing market.

It’s important to make a will and let your beneficiaries know about the mortgage so they will be aware of the reduction in the proceeds of your estate on death.

Sources
https://www.ftadviser.com/mortgages/2020/01/06/does-your-client-need-a-retirement-interest-only-mortgage/?page=2

Planning around the retirement threshold

By now, if you are somewhere in the retirement experience – either approaching it, passing through it or leaving it behind – you will already have experienced firsthand your own childhood and maybe that of your children, grandchildren and great-grandchildren. Now you are heading to experience later life, which for most of us will stretch forward for more time than we might have expected all those years ago.

We have reached the point where being ‘over the hill’ should mean something quite different to what we might have thought when we were younger, about older people. Time has not caught up with us, but we have now captured it – it will be ours to do with what we will. If we are ‘over the hill’ then it is more a case of picking up speed and looking for what we can open up in front of us, further down the line.

What’s your concept of a later life plan? Is it a path along which you plan to travel, a bit like Dorothy setting off down the Yellow Brick Road, in the Wizard of Oz? Or should we view our future and plan from the perspective of Willie Wonka’s Great Glass Elevator, quite unlimited in its potential to travel up, down, sideways, forwards or backwards. For most of us, later life can be a period of opportunity.

Making sure we’re prepared for all of the above is about more than financial planning. Quality of life concerns, desire and purpose come before finance, which is there to support the manner of living to which we would want to become accustomed. There is little doubt that we will need to cut our cloth accordingly, but not everything in later life comes with a price tag attached. Maybe your planning needs to err on the side of non-materialistic things, affordable opportunities: doing rather than owning!

The later life planning process is as important as the outcomes. The emerging plan will always be open to revision. Tinkering with your plan, bucket-list, short-term calendar and one-page plan will become part of the adventure. Satisfying needs in your plan will not be enough: go for the wants and desires, and hopefully these won’t all be about spending money!

If you are ready for planning around retirement and holistic later life planning, here are five priority components which should inform your thinking and your plans:

1 – Health and Wellbeing – thinking about how to sensibly exercise, keep fit and not over-abuse your physical body. With later life comes physical decline and it’s best to slow this down. Bits of you will sag or fail you eventually, but an active lifestyle is a major part of a quality life.

2 – Social Life – most of us need a social life and in retirement this becomes more important, replacing a work orientated lifestyle. See what’s available, plan to renew relationships, join in things and investigate local opportunities.

3 – Breaks, Holidays and Adventures – plan to punctuate your later life with these, which often bridge the longer quieter periods, and become highlights. This is where the ongoing bucket-list approach to planning is so useful. Cross them off and find more!

4 – Work – being gainfully occupied late in life might be a nice earner and could be a focus for your planning if you have long hankered to do something different as work or in a business. Otherwise, and in addition, consider getting involved in the world of voluntarism.

5 – Learning Activities – these can be any part of the other components, where you learn within each. You could pursue formal learning or plan to learn as you go along, from your enriched later life and the opportunities and experiences you have planned for.

Sources
www.communitylearningdevelopment.com (Website draft article: 2015/05/27)

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.

Would more people actually like to retire a little later?

This may seem a surprising suggestion. Surely most people are eagerly looking forward to early retirement, not thinking about postponing it? More time to travel the world, spend on the golf course or help out with the grandchildren sounds an enticing prospect rather than more years at work.

But times have changed significantly since the state old age pension was first introduced in 1909. In those days, it was paid to those aged 70 or more and people weren’t expected to live many years beyond that.           

The UK Government is in the process of raising the state pension age to 66 (from the current 65), with an expected completion deadline of October 2020. These rises in the state pension age roughly correlate with the rise in life expectancy. People live on average at least another fifteen years beyond their ‘three score years and ten’.

Back in 1948, a 65-year-old would expect to take their pension for about 13.5 years, equating to 23% of their adult life. This has risen steadily. Figures in 2017 showed that a 65-year-old would expect to live for another 22.8 years, or 33.6% of their adult life.

A significant number of people even live to 100 these days. So much so that the Queen has had to expand her centenarian letter writing team to cope with the number of people requiring a 100th birthday message from the Palace.       

According to the Office of National Statistics, the number of centenarians in the UK has increased by 85% over the last 15 years.This trend is set to continue so that by 2080 it is anticipated there will be over 21,000.

In recognition of the fact that people are living longer and spending a larger proportion of their adult life in retirement, a government review will consider increasing the state pension age to 68 between 2037 and 2039.  

Currently, if someone retires at 65 and lives to 100 it makes for a long retirement. Not only is it  expensive for the state to maintain, the individual is worried about outliving their finances rather than being able to get on and enjoy their retirement. The state pension was not designed to support a long period of limbo. 

Against such a backdrop, it makes sense for some individuals, if they are fit, healthy and capable, to consider working beyond their pension age. There is no longer any default retirement age at 65, so it is perfectly possible to do this.  

The older generation also have a great deal to contribute to an employer in terms of experience and commitment. In addition, it’s well known that going to work each day gives some people a reason to get up in the morning and also to keep young. There are many unfortunate cases where someone has worked all their life, looking forward to their retirement, only to fall seriously ill or die the moment they stop work.    

The number of 70 year olds in full or part-time employment has been steadily increasing year on year for the past decade, according to data from the Office for National Statistics. This hit a peak of 497,946 in the first quarter of 2019, an increase of 135% since 2009. 

So rather than just worry about whether you will have enough for your retirement, maybe it makes sense to keep working a little bit longer.  

Sources
https://www.telegraph.co.uk/news/2019/08/19/not-raise-pension-age-people-would-rather-retire-little-later/

https://www.gov.uk/government/news/proposed-new-timetable-for-state-pension-age-increases

https://www.theguardian.com/money/2019/may/27/number-of-over-70s-still-in-work-more-than-doubles-in-a-decade

https://www.ons.gov.uk

The retirement mistruth

If you pay much attention to the media and advertisers, you may think that retirement is all about riding jet skis, sipping sherry on the French riviera or cuddling grandchildren. No doubt you’ve seen one, if not all, of the images on many of the retirement articles out there. Though those sorts of activities are an important part of retirement, a recent study has revealed retirement to be more of a double-edged sword. For many, the first few months can involve a lack of purpose leading to something somewhat akin to a later life crisis, according to Harvard Business School professor Teresa Amabile. 

It’s certainly hard not to lie about retirement because of the social norms associated with it. It’s meant to be the best time of a person’s life, that they’ve been working hard for. But it causes people to say one thing, and feel another. Professor Amabile interviewed 120 professionals about their views of retirement, at different stages of their careers. 

“People think of planning for retirement as a financial exercise, and that’s all. It also needs to be a psychological and relationship exercise as well.

“We need to think about who we will be – who we want to be when our formal career ends. The people in our study who do that, tend to have a smoother transition.” 

Revelations also arose when it came to how respondents described themselves. People often used their previous job title as a suffix to their retired status, usually saying that they were a ‘retired librarian’ or a retired ‘research chemist’ and the like. Though it’s important to be proud of what you’ve achieved during your career, it’s still important to prepare yourself for retirement as making sure you’re of sound mind as well as sound wallet will lead to better wellbeing after you draw the curtains on your career. 

However, this doesn’t mean that work has to come to an end. There are plenty of retirees out there who still consult in their previous profession – some even take the opportunity to pursue other avenues of employment that they’ve always been interested in. There are plenty of remedies to the retirement riddle that don’t need to resort to a kind of ‘forced leisure’ that is often associated with retirement. The truth is, you don’t have to relax or slow down if you don’t want to – as long as you remain realistic. 

It’s something that a retirement plan can help with tremendously as, more often than not, you’ll have to think about what you’re going to do when the time comes. It’s not all just financial saving strategies and tax mitigation, it’s about getting yourself into the mindset that retirement is on the horizon, and when it comes to the day that you draw your pension, you’ll be all the more prepared to make the most of it in a way that’s true to yourself and who you are. 

Sources
https://www.bbc.co.uk/news/business-48882195
https://www.forbes.com/sites/robertlaura/2019/06/13/will-retirement-turn-you-into-a-liar/#67e84b6b73de

Generation X is failing to save for their pensions

With rising costs of living affecting the way we live our lives, it seems that pensions have taken a back seat for some. Workers in their forties and fifties from generation X have left the organisation of their pension to the last minute, with many savers now pouring money into their pots, trying to make up for lost time.

According to a study carried out by Salisbury House Wealth (SHW), Gen X accounted for 43% of all UK pensions savings in 2018. This marks a dramatic surge in savings, increasing by 14% from the previous year, making up £3.7bn of the £8.5bn saved during the course of the year.

Tim Holmes, managing director of SHW, said: ‘Many individuals in generation X are finding their incomes squeezed by having to pay for both younger and older dependents. As a result, pensions will likely only become a priority at the last minute.’ Tim later goes on to point out that although it may seem wise to leave saving to a later date, your investments may not have enough time to grow.

This seems to link with the white paper produced by the Financial Conduct Authority (FCA) earlier in May on intergenerational differences. The paper noted that between 2014 and 2016, people aged 40 to 50 had less total wealth when compared with people of the same age 10 years earlier. The FCA has suggested that an open debate is required in order to understand the specific challenges that these particular age groups face.

Older people are living longer as life expectancy increases. Baby boomers are having to develop new financial strategies to maintain living standards in later life whereas younger people are struggling to build wealth due to rising house prices, insecure employment and student debt.

The FCA points out that Gen X are likely to be financially stretched, as they are torn between the responsibility of helping older generations in later life whilst also providing financial support for younger generations, leaving less money that can be set aside for their pensions.

Christoper Woolard, executive director of strategy and competition at the FCA, says that from ‘baby-boomers to generation X to millenials – everyone’s financial needs and circumstances are evolving. It is clear that each generation will have its own challenges.’ He goes on to say that now is the time to ‘step back, consider and understand how these needs are evolving and challenge assumptions about customer needs in the context of intergenerational factors.’

What does it take to retire early?

The idea of retiring in your 50s or even your 40s sounds like a pipe-dream to most, what with the increased cost of living, inflation and other economic factors slowly eating away at your predicted earnings. This hasn’t stopped the rise of the FIRE (Financial Independence Retire Early) movement, though, a new method of frugal living that aims for early retirement, escaping long working lives and living off the stock market or other supplementary income for good.

One of the most infamous experiments carried out by Stanford University is the marshmallow experiment, where a pair of psychologists gave children a choice: one reward now, or two rewards if they waited around 15 minutes. Some of the children took the early reward of a marshmallow. Others struggled, but managed to wait longer, occupying themselves until it was time to receive a double reward.

Saving for retirement can be very similar to the lesson in delayed gratification, only more difficult. The children knew what reward awaited them should they be patient – most adults don’t have a clue if their savings will be enough for the future. When the reward is intangible or complicated, it’s even more difficult to set limits now in the hope of future benefits.

So, how do you do it?

Keep your spending in-house

From small seeds of saving do sturdy trees of retirement grow. Simply put, it’s good to aim small when beginning your savings journey. That £2.65 coffee from your local coffee shop is now going to be an instant in the office. No more eating out for lunch, it’s time for homemade meals to be brought into work with you. Cutting out the small daily expenses can really help boost your long term savings and help usher in that desired early retirement. Let’s take our £2.65 coffee for example, the average UK citizen works around 260 days a year – that’s £689 a year!

Utilise technology

There are a number of apps available, such as Moneybox, that make some basic assumptions about stock market returns and inflation rates which then inform you as to how much you’ll need to save. Having a handy app on your phone can help you make decisions on the fly and allow you to check what a potentially impulsive purchase may cost you in the future.

Shop around

Saving money where you can on bills, transport and other outgoings can help to grow your retirement pot quickly and without too much skin off your nose. Ask yourself whether you really need that magazine subscription or streaming service. Can you find a better deal on your phone or energy contract? The answer is often yes.

Take advantage of saving opportunities

The government has recently introduced a new Lifetime ISA open to those aged between 18 and 40. LISA account holders can save up to £4,000 a year, with the government adding an annual 25% bonus up to a maximum of £1,000. There is a limit, however. You won’t be able to contribute to a LISA or receive the bonus when you turn 50, but the account will stay open and your savings will continue accruing interest or investment returns. For more information on the terms of withdrawal and eligibility, check out this government’s guide.

Decide what your goals are

Ready for some serious saving? Pretirement is an app developed for the financially-inclined who want to put away small savings over the long term in order to save for a holiday or a new car. Their headline claim, using their clever algorithm, is that by saving £800 a month towards your retirement, you shave years off your working life, depending on what your retirement goals are.

And there’s the big question. What are your retirement goals? Do you want to live a life of luxury, enjoying all the potential freedoms that your new found free time will have to offer? Or would you rather have a comfortable yet frugal retirement. There’s a whole range of options available to you, and your retirement goals will help to inform you of how much you need to save and invest. A financial adviser can be a great help in determining this factor as they can give you direction on what the ideal savings plan is for you.

At the end of it all, the message is to save when and where you can. It’s about growing your savings and securing your finances.