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.
The fact is, most of us are simply not saving enough to enjoy a similar lifestyle to our working days in retirement. A ‘retirement reality’ report from insurer Aviva shows that nearly 1 in 4 employees believe that retirement will be a financial struggle.
There are plenty of legitimate reasons why we don’t save enough – more immediate financial concerns will naturally take priority. You can’t save for tomorrow, for example, if it means forgoing your mortgage payments today. A lack of financial education also plays a big role. 85% of young adults, when surveyed, revealed that they wish they had been taught more about finance management through their school and university careers.
The Government’s auto-enrolment workers’ pension initiative has helped and there are around 1 million people saving for their retirement for the first time ever, as a result, but how do the numbers add up? The minimum auto-enrolment contribution rate is 5% of annual income, and despite more than half of workers believing this is the recommended rate of saving, it’s far from it. The generally accepted figure among experts, if you wish to maintain a similar lifestyle in retirement, is a contribution equal to 13% of your annual income. Some of this deficit will be made up by employer’s pension contributions, however, we’re still looking at a wide gulf between actual savings and those that are required.
Investment house, Fidelity, has devised a system it calls the ‘Power of Seven’, consisting of a number of savings goals. Ultimately, it suggests that to comfortably retire at 68, you should have saved the equivalent of 7 times your annual household income. So if you were to retire with a household income of £50,000, you’d want a pension pot saved of £350,000. The exact figures will differ from case to case, so it’s recommended to use an online pension calculator to understand your personal situation and check it regularly to keep yourself updated.
There are steps you can take to bolster your pension pot. It’s down to you to take responsibility for your finances, and even small steps like being a member of the works pension scheme and using tax friendly Savings Accounts can be helpful. If you receive a pay increase, perhaps allocate half of it to your savings or investments and enjoy the other half now. As tempting as it can be, it’s important to foster self control to turn down opportunities for frivolous spending – think about tomorrow and give yourself more options in your golden years.
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.
There’s been a lot of talk in the press recently about generational inequality, which has mostly been with good reason. Those currently in their twenties and thirties are earning far less than people the same age did 10 to 15 years ago.
The 2008 recession has put the millennial cohort far behind in terms of earnings and wages. Wages have never fully recovered since the recession and are still behind their pre-financial crisis peak. Many may be unable to ever afford to get on the property ladder, meaning they will have a lifetime of rent payments to fund.
Also, rising house prices have meant that the average deposit has risen from around £10,000 in the Eighties and Nineties to between £50,000-60,000 today, according to analysis by accounting firm PwC. Even when adjusted for inflation, the rise is dramatic.
Auto-enrolment in pension schemes has begun to address some of the long term issues around retirement funding but even still, these do not compare to the security offered by ‘gold-plated’ direct contribution schemes.
The younger generation are already aware that they will have to work far longer. Early retirement will likely be the premise of the rich, lucky or extremely frugal. Fortunately, millennials look set to be able to cope with the demands of a longer working life. The younger generation are fitter and healthier compared to previous generations with far fewer smokers and better diets.
Although a longer working life might be a path towards an eventual retirement, it does little to help young people get on the housing ladder. The fact of the matter is that many young people will need some kind of ‘leg up’ if they are to achieve the financial stability that many of the ‘baby-boomer’ generation managed.
The income gap between older and younger generations means that many young workers will have to rely on the wealth accumulated by their parents and grandparents if they are to sustain the same quality of life.
Family loans have become increasingly important for the financial wellbeing of young people. Many are giving younger generations so-called ‘early inheritances’ in the hope that such loans will enable them to get a foot on the property ladder. This is already so widespread that nearly eight out of 10 first-time buyers in London are receiving some sort of financial help from their parents.
Parents and grandparents are funding help through a variety of means. Almost three quarters of parents used their life savings to help out with the cash, while a third downsized or released equity from their homes. Another third accessed pensions cash; either cashing in lump sums through income drawdown or annual annuities. 7% remortgaged and 6% took out a loan themselves.
Sunniva Kolostyak “Fireworks for millennials” in Pensions Age, November 2018
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.
Retirement should be the time of your life. No more early alarm calls, no more commuting and no more carefully counting your holiday allocation. Instead, you have the freedom to do exactly as you please. Yet retirement might not always work out as the idyllic move to a cottage by the sea it’s billed to be. Some people, in fact, dread retirement and feel they’re being put out to grass. They fear they’ll miss the structure and companionship that work gives. Think of it more as ‘change’ not ‘old age’
Think of it more as ‘change’ not ‘old age’
Retirement is automatically associated with old age in people’s minds. The very word conjures up images of people sitting around in retirement homes in their slippers, watching daytime T.V. But this is far from the truth. Old age, today, encompasses a vast span of years, from 65 to 100. There are many active retirees living life to the full. And if you think how much the average person’s life changes between 25 and 60, just think how many possibilities could lie ahead in the same timeframe. Going from work to retirement is a huge transition – yet people cope with many other major transitions during the course of their lives; having a baby, changing jobs, going through a divorce, moving house. The key is to use your resilience and strength from previous times of change to help as you move into retirement. Don’t see it as entering old age, see it more as a time of embracing life’s opportunities.
Don’t just be concerned about the money side of things
That may sound a curious thing to read in a financial newsletter. And pensions will form a key part of any more retirement planning. There’s also no denying that pensions can be complex so it’s important to find the right solution for your situation whether it’s taking an income or accessing a lump sum. But the financial side of things is much wider than just your pension. So take time to think about what your ideal lifestyle would look like. Think about some proper financial planning. What are your goals and ambitions for retirement? Are your current finances on track to help you reach them? The money is just an ends to enable you to live a happy retirement and find a new purpose.
Be clear in your mind what you really want to do
In today’s world, where such value is placed on career status, retirement can be seen as an end rather than a new beginning. But you don’t have to be in paid employment to be happy and fulfilled. You may, in fact, find you achieve far more satisfaction in life after work. Why not do something you’ve always wanted to but never had time to? Learn to play a musical instrument, take up a sport, sign up for some volunteering, enrol on a course, get involved in a conservation project, travel the world… This is your time to do as you please. Remember, you don’t have to be constantly busy – sit back and reflect on your true values.
Adopt a proactive mindset
You often hear stories of people becoming ill, or even dying, within months of stopping work – a cruel twist of fate after they’ve laboured hard for years, looking forward to their retirement. According to the Office for National Statistics, though, health and wellbeing do actually increase in retirement while depression and anxiety often fall. This is as people have more time to adopt a healthy lifestyle and find new sources of fulfilment and exercise. The key seems to be to make a determined effort to stay sharp, be proactive and keep stretching your boundaries. It may sound surprising but workaholics often love retirement as much as they loved their careers.
There was scarcely a mention of the ‘P’ word in October’s Budget speech (believe us, we were listening closely for it!). Instead, Hammond used the Budget speech as an opportunity to unveil his ‘rabbit in the hat’ changes to income tax thresholds, an increase in NHS mental health funding and a ban on future PFI contracts.
However, we had a good read of the accompanying ‘Red Book’ for any mention of pensions. At 106 pages, this was no mean feat. Fortunately, though, it was time well spent as we found some changes to pensions you may otherwise have missed:
The pension dashboard
HM Treasury confirmed that the Department for Work and Pensions (DWP) would look at designing a pension dashboard which would include your state pension. The pensions dashboard will be an online platform that will let you see all of your pension schemes in a single view. The average worker is nowadays expected to work eleven jobs during their career and keeping track of so many pension pots could prove confusing to say the least.
There was an extra £5 million of funding for the DWP to help make the pension dashboard a reality. Commentators see the dashboard as a welcome sign that the government is committed to helping savers keep track of their funds.
Patient capital funding
The government announced a pensions investment package which should make it easier for direct contribution pension schemes to invest in patient capital. Patient capital refers to investments that forgo immediate returns in anticipation of more substantial returns further down the line.
The government may review the 0.75% charge cap and there is widespread speculation that it will be increased to allow more investment in high growth companies.
Cold calling ban
The government has promised to ban pensions cold calling as part of a drive against pension scammers. Almost two years since the government’s initial proposals to combat pension scams were announced, pensions cold calling will finally be made illegal.
Research by Prudential indicates that one in 10 over 55s fear they have been targetted by pensions scammers since the introduction of pension freedoms in 2015. Cold calls, with offers to unlock or transfer funds, are a frequently used tactic to defraud people of their retirement savings.
As much as these measures go a long way to making people’s pensions more secure, the government will be powerless to enforce cold calls made from abroad and not on behalf of a UK company. It is unclear how and if the government will work with international regulators to mitigate the dangers of such calls.
Sustainable investing has grown rapidly over the last couple of decades. Investors are increasingly committed to the social and environmental impact of where they put their hard- earned money. Getting good financial returns and having a positive impact on the world are not mutually exclusive. Impact investing and ESG investments allow investors to ‘kill two birds with one stone’, as they say
American financial association SIFMA estimates the market size of sustainable investments to be $8.72 trillion. That figure was calculated in 2016, so it’s likely to be substantially larger than this now.
ESG and impact investing are two terms frequently confused in the world of sustainable investing. They’re often used interchangeably, which is a shame because it risks obscuring what the different terms actually mean; they are quite different. ESG is a framework for determining the impact of an investment whereas impact investing is an approach.
ESG stands for environmental, social and governmental. It’s a framework that can be integrated in the risk-return analysis of different investment opportunities. By drawing from a variety of data, some gathered from company and government disclosures among other sources, it allows investors to examine how companies manage risk and opportunities in three key areas:
This refers to a company’s impact on the environment. It looks at certain aspects of a company’s operations, such as how they dispose of their hazardous waste or how they manage carbon emissions.
Does the company take measures to have a good social impact? This can include philanthropic and community focused activities or any measures the leadership takes to promote diversity in the workplace.
This deals with the leadership and strategy of a company. It addresses aspects such as staff pay and communication with shareholders.
An ESG framework is a valuable tool that may be used to evaluate how certain behaviours can affect a company’s performance. However, it’s not an investment strategy in and of itself. With ESG, the wider impacts of investments are considered but financial performance still takes precedence.
Impact investing means using investments to cause positive social or environmental change. Examples include supporting access to clean energy or working to improve social mobility by investing in companies operating in underprivileged areas. In contrast to ESGs, in impact investing financial performance is secondary to the overall social or environmental impact.
The financial return of impact investments varies between cases. Some investors intentionally invest for below market rate returns in line with their strategic objectives. Others pursue competitive, market-rate returns. According to GIIN’s 2017 Annual Impact Investor Survey, these account for the majority, with 66% of impact investors aiming for market rate returns.
Because maximum returns are sacrificed in favour of investing for a particular social or environmental agenda, there’s the possibility that certain opportunities may underperform relative to other widely available options. When maximum profit isn’t the goal, sometimes the financial returns can suffer.
This said, impact investing shouldn’t be confused with charity. The objectives of impact investing are financial as well as social and environmental. There are many companies whose operations have a positive impact on the world and investing in these is an effective way of contributing towards long term social and environmental progress.
The shift towards impact investing and ESG highlights a growing desire among investors to do well by doing good. They are increasingly a core offering, rather than something that is ‘nice to have’. However, as with any investment decision, it’s a good idea to do plenty of your own research and seek financial advice to see how ESG and impact investing could fit with the rest of your portfolio.