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the longevity challenge and how to tackle it

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.

Sources

Prevalence by age in the UK


https://www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/populationestimates/articles/overviewoftheukpopulation/july2017

Defining and evidencing Sustainable Withdrawal rates

are children’s pensions as good as they seem?

Pensions for children? Surely that’s taking planning ahead to a whole new level?

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.

Sources
https://www.ftadviser.com/pensions/2018/05/09/danger-of-children-s-pensions-laid-bare/
https://www.bestinvest.co.uk/news/are-pensions-for-children-bonkers-or-brilliant
https://www.moneywise.co.uk/pensions/managing-your-pension/start-pension-your-child

are you keeping an eye on your pension pot?

Keeping track of your pension pots can feel like a full time job at times, particularly as we head towards a world where the average person will have eleven different jobs over the course of their career. It’s becoming increasingly uncommon for people to stay in the same job throughout their employment. In fact, we’re now seeing that 64% of people have multiple pension pots; that’s up 2% since October 2016. While that in itself is not a worry, what is more troublesome is that of that 64%, 22% have reportedly lost track of at least one of those pots.

Which means there are more than 7 million people who may not have access to the retirement funds they’ve worked hard to amass. To make sure you’re not one of them, it’s really important to keep on top of the bigger picture of what you’re owed.

Despite an increase in pension awareness, thanks to auto-enrolment, recent research has shown that 30% of people still do not know the value of their pension. Of course, if you’re not sure of the full value of your savings, it makes it hard to plan properly for retirement.

For some, the best way to get a clearer view of the situation is through pension consolidation. If you have a number of small, automatic enrolment pots, it could be worth bringing them together to make them more manageable. Consolidation isn’t necessarily the right choice in all circumstances, though. Certain pensions, particularly those of an older style, will come with great benefits that may be relinquished upon consolidation. Whether or not this is the right path for you will depend on your personal situation, so it’s always a good idea to consult an adviser to talk you through the process before making any decisions.

If you think you may have lost sight of a pension pot yourself, there is a pension tracker available through the Department for Work and Pensions that will help you locate it.

Sources
https://moneyfacts.co.uk/news/pensions/over-one-fifth-have-lost-pension-pot/

update on state pensions: essential reading for the under 50s

Recent changes announced by the government to the state pension will result in nearly six million people currently in their forties having to wait longer until they can retire. It’s a development which has raised concerns over the dependability of the state pension, which for many makes up the lion’s share of their retirement income and is the most valuable state-funded perk for even more people.

For the seven decades between 1940 and 2010, the state pension age remained constant for both men (65) and women (60). However, thanks to the 1995 Pensions Act, the age for women was increased to 65, a change which was to be phased in between 2010 and 2020. This was then altered further when the Conservatives and Liberal Democrats formed the coalition government in 2011, speeding up the process so that the age for women would increase to 65 between April 2016 and November 2018, with a further increase to 66 for all working adults from April 2020.

Under these plans, the state pension age would be 68 for those born after 6th April 1978. But the changes announced in July this year mean that window will increase to include those born between 6th April 1970 and 5th April 1978. The pension age for anyone currently under 39 is yet to be confirmed. The changes are likely to affect the younger generations who have lost out through the closure of ‘final salary’, or ‘defined benefit’ pension schemes.

Those in their late 30s and 40s are being described as the ‘sandwich generation’, being as they’ve missed out on the final salary pension schemes enjoyed by older generations, but are now too far through their working lives to feel the full benefit of automatic enrolment which younger generations will experience.

However, there are further concerns that things could change yet again, as the government has stated that law on the proposed pension changes won’t be passed until 2023, essentially preparing to pass the legislative aspects on to a future government. Thanks to Theresa May’s weakened position and Labour’s opposition to the proposed increases to state pension age, the changes may not happen at all.

As such, there have been calls from those in the financial world for an independent body to oversee any future changes, as well as the establishment of a national savings strategy to help people with their savings and investments to provide for their future

Sources
http://www.telegraph.co.uk/pensions-retirement/financial-planning/state-pension-shake-everyone-50-needs-know/

4 steps to keep 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

Government launch date for 120% drawdown limit …

The new drawdown limit of 120% will be introduced from 26 March, the government has revealed.

Chancellor George Osborne announced plans to return the limit for capped drawdown to 120% of  GAD (the Government Actuary’s Department) rate in his Autumn Statement in December 2012, but gave no date for the change.

In April 2011 the government changed the drawdown limit from 120% of the GAD rate, reducing it to 100%.

Prior to this, individuals could take 120% of the income level set by GAD. This was reduced to 100% in order to prevent investors from depleting their savings too quickly.

The move to reinstate the 20% uplift at the end of last year followed growing pressure from pension providers and MPs, who received complaints from retirees hit by cuts of up to 50% in their income as the GAD rate tracked annuity rates downward.

How providers are going to facilitate this change we are unsure at the moment, although welcome for retirees in drawdown they still have to wait until March.

 

For further information please do not hesitate to contact us on 01737 225665 or advice@conceptfp.com

 

building your financial future

 

 

Source: Citywire NMA Alex Steger

Pension Death Benefit Changes – April 2011

Information from Her Majesty’s Revenue and Customs (HMRC) signals that there will be a number of significant changes in the pension death benefit rules from April 2011.

The main changes after April 2011, concern three aspects:

1) what pension benefits can be passed on at death

2) what the tax charges may be

3) what the implications are for Inheritance Tax liability

The last major revisions to the HMRC Pension Death Benefit rules were made in April 2006.

For deaths after 5th April 2011, pension lump sum benefits will be allowed at any age. If these benefits are paid to dependants from ‘crystallised rights’ (relevant existing pensions being paid to the individual, which can be an aggregate of several pensions) a tax charge of 55% will be made – an increase from the present 35%. A tax exemption may be allowed if this lump sum death benefit is made to a charity.

From 6th April 2011, the risk of Inheritance Tax charges on pension rights is lessened. Previously any changes to pension rights by an individual, prior to death, such as deferring taking retirement benefits (depriving an estate by an ’omission to act’) or reducing pension income, could be perceived by HMRC as an attempt to benefit others after their death.

Where HMRC perceives that an individual had deferred taking their retirement benefits or had reduced their pension income for retirement planning reasons, HMRC will not pursue a claim, particularly if the benefit is paid to a widow(er), civil partner or financial dependant.

On death, if before age 75, after 5th April 2011, any lump sum benefit will still be tax free if paid from ‘uncrystallised rights’ – funds held in respect of the member under a money purchase arrangement that have not as yet been used to provide that member with a benefit under the scheme and so have not crystallised.

Lump sum death benefits paid to charities from ‘crystallised rights’ will not be subject to the 55% tax charge. After 5th April 2011 the option to pay non-annuitised pension benefits tax free to charities, has been extended to include deaths before age 75, subject to a number of criteria, including that the deceased member or dependant has nominated a recipient charity. It will be no longer possible for a scheme administrator to nominate a recipient charity.

Basic State Pension Increasing

Basic State Pension Increasing To £102.15
The maximum Basic State Pension (BSP) is rising in April 2011 to £102.15 per week. This is a rise of 4.6%. This is the first time the new increase rules have been applied – the BSP will increase annually by the greater of earnings, prices or 2.5%.
Other rates from April 2011 include:
• Pension Credit – £137.35 pw (single) and £209.70 pw (couple)
• Personal Tax Allowance – £7,475 pa (under 65), £9,940 pa (65-74) and £10,090 pa (75 and over)
• Lower Earnings Limit – £102 pw
• Upper Earnings Limit – £817 pw
• Primary Threshold – £139 pw
• Class 1 National Insurance Contribution (NIC) Rate – 12% (on earnings between primary threshold and upper earnings limit) and 2% (on earnings above upper earnings limit)
• Class 2 (self-employed) NIC Rate – £2.50 pw
• Class 2 NIC Small Earnings Exception – £5,315 pa
• Class 3 (voluntary) NIC Rate – £2.60 pw
• Class 4 (self-employed) NIC Rate – 9% (on profits between lower and upper profits limits) and 2% (on profits above upper profits limit)
• Class 4 NIC Lower Profits Limit – £7,225 pa
• Class 4 NIC Upper Profits Limit – £42,475 pa
• Widowed Parent’s Allowance – £100.70 pw
• Bereavement Allowance (Standard) – £100.70 pw

Building your NEST egg?

Britain’s population is ageing, yet many individuals are not saving enough to provide themselves with a comfortable retirement. Recognising that this situation was unlikely to improve on its own, the government introduced the Personal Account, a simple low-cost pension scheme that will begin enrolment in 2012.

What is NEST?
More recently, the scheme has been rebranded as National Employment Savings Trust (NEST). NEST is an independent pension scheme run by a trustee body, NEST Corporation, for the benefit of its members. It is intended to help individuals boost their savings for retirement and is likely to be delivered online.

NEST for employers
At present, 750,000 private-sector employers do not offer a workplace pension scheme. Under the new rules, employers will have to enrol all eligible employees into a qualifying pension scheme and then contribute to that scheme. Employers of all sizes and in all industries can use NEST, which can be used on its own or alongside other workplace schemes. Employers are not obliged to use NEST, but they do have to offer a scheme that is at least as good as NEST if they decide not to take up the option.

NEST for employees
Under the new rules, all qualifying employees will be enrolled automatically into their default workplace pension scheme and then contribute to that scheme, although individuals are able to opt out if they wish. Once enrolled, they are likely to be able to choose how their money is invested from a range of investment funds and if they leave their job or move to one where the employer does not use NEST, they can opt to continue saving in that scheme. Self-employed individuals are also able to join NEST.

Contributions
The maximum annual contribution into NEST is £3,600 (index linked from 2005), so there is scope for employers and employees to make additional contributions if they wish to top up the minimum contributions. With a few exceptions, transfers in and out of NEST are not permitted, although this will be reviewed in 2017.

A relatively positive reaction so far
So far, NEST appears to have been relatively well received by financial advisers and consumer groups. In particular, Which? personal finance campaigner Doug Taylor has commented, “This is another important milestone… consumers want a brand they can trust working for them and the best return they can get for their contributions. We believe that NEST will deliver that.”

Will NEST deliver the intended result? only time will tell ……

Pension Planning – Concept Financial Planning

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Planning ahead

Throughout every stage of your life, finding the right balance of investments can be a challenge. When stock markets are volatile, investor sentiment is fragile and economic growth is weak, it can seem even more of a conundrum, particularly if you are near retirement. Achieving the right balance of investments is crucial if you want to enjoy a comfortable old age.

Britons are living longer, and it is now not unreasonable to expect 30 – or even 40 – years of retirement. State pensionable age is likely to continue its rise, forced higher by the massive budget deficit and increased lifespans in the UK. It is wise to start planning early – you shouldn’t wait until you are near retirement before considering your circumstances, so take stock of your situation well in advance. 

In order to do this you need ask yourself some questions; When do you want to retire? How much do you need to ensure a comfortable lifestyle? What are your liabilities?  What have you saved so far? Consider all your assets that might be able to generate future income for you, in order to determine the maximum income you might be able to achieve. 

As you approach retirement, your attitude to risk is likely to change, and effective asset allocation becomes even more important. Higher-risk asset classes, such as equities, tend to perform well over the long term; however, as you near retirement, your portfolio will have less scope to recover from a stock-market decline. Therefore, as you grow older, it makes sense for your portfolio’s asset allocation to evolve with you and you might want to consolidate your gains and shift into assets with a lower risk profile.

A reduced risk profile is likely to lead to a portfolio that focuses less on volatile assets, such as equities, and more on lower-risk asset classes such as bonds and cash. One simple rule of thumb relates to an investor’s age: if you are 25, 25% of your portfolio should be in bonds and cash; if you are 40, 40% of your portfolio should be in bonds and cash. On this basis, by the time you reach the age of 65, your portfolio should have a maximum of 35% invested in higher-risk investments such as equities.  At Concept Financial Planning we use risk and time adjusted portfolios which balance the risk reward trade off.

Of course, everyone’s circumstances are different, but proper planning will help you towards the retirement you want.  Nevertheless, this is a complex area; expert advice is essential.

Pension Planning Guide

Pension Income Options

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