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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 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/

what is the tapered annual allowance and how could it affect you?

One of the key advantages of saving for your retirement through a pension scheme is the tax relief you receive on the money you contribute, usually available at your usual rate of tax. The ‘Annual Allowance’ limits the amount of contributions both you and your employer can make to your pension in a year which benefit from tax relief, and is currently set at £40,000.

However, in April 2016, the government also introduced the ‘Tapered Annual Allowance’, which reduced the annual limit for those whose total income exceeds £150,000. This amount includes your salary, bonuses, dividends, savings interest and employer pension contributions. For every £2 of income above £150,000, your Annual Allowance will be reduced by £1, up to a maximum reduction of £30,000. So that those who receive a one-off increase in pension contributions from their employer are not unfairly caught out, the government also ensured that the Tapered Annual Allowance only applies to those whose taxable income before employer pension contributions is above £110,000.

Looking at some examples shows how the Tapered Annual Allowance works. Andy receives a salary of £160,000 in the 2017/18 tax year, with a further £16,000 of pension contributions from his employer. This gives a total income of £176,000, which is £26,000 over the £150,000 limit. Andy’s Annual Allowance is therefore reduced by £13,000 (half of that amount), meaning the amount of his pension contributions which can benefit from tax relief during 2017/18 is lowered from £40,000 to £27,000.

Bethany, meanwhile, earns a salary of £195,000 in the same year, with her employer making £15,000 of pension contributions. Her income from rental properties, savings and a share portfolio amounts to £20,000, giving Bethany a total income of £230,000, exceeding the £150,000 limit by £80,000. As half of this amount is £40,000, Bethany will receive the maximum reduction of £30,000. She will therefore only receive tax relief on up to £10,000 of her pension contributions in 2017/18.

If the Tapered Annual Allowance affects you and you’re wondering whether there are any legal workarounds which can be implemented to avoid being hit by it, the short answer is that there aren’t. Of course, if your total income decreases then your Annual Allowance will increase again. But apart from either earning less or reducing the amount you and your employer contribute to your pension (neither of which is a good idea), as long as your total income is over £150,000 you will be subject to the current rules,

Sources
http://scottishwidows.co.uk/knowledge-centre/retirement/annual-allowance.html
https://www.rsmuk.com/ideas-and-insights/tax-facts-2018-2019#Pension%20contributions

 

4 saving habits of millionaires

There are no shortcuts or guarantees when it comes to achieving self-made millionaire status. That said, it can’t hurt to look at the financial habits of those who have managed to do just that to try and boost your own coffers. Here are our top tips from looking at those who’ve become millionaires by age 30. Who knows, they might just lead to you being worth seven figures in the future.

  1. Don’t rely on your savings – The current economic environment makes it very difficult to become wealthy through saving, so increasing your income is an obvious but good way to boost your bank balance. Whilst increasing your main salary can also be a challenge, you might think about other ways to achieve this such as earning passive income through property rental, or taking on freelance or consultancy work on the side (just keep an eye on any tax repercussions).
  2. Invest, invest, invest – Instead of saving for a rainy day, put your savings into investments. If you choose investments and accounts with restricted access to your funds, not only will this ensure your investments pay off, but it will also help you to focus on increasing your income rather than relying on money you’ve put away.
  3. Change your mindset – Nobody has ever become a millionaire without believing that it’s something they themselves can both achieve and control. The best way to do this is to invest in yourself. Spending time educating yourself about both your business area and the financial world in general will help you to understand how to capitalise on opportunities and genuinely believe you can increase your net worth.
  4. Make plans and set goals – You’ll only boost your wealth if you actually plan out how you’re going to do it. Before you can make a plan, however, you need to decide what you’re aiming for. If you really do want to become a millionaire, then think big: if you have a certain figure you want to achieve, aiming higher will help ensure you reach it or even surpass it.
Sources

http://www.independent.co.uk/life-style/9-things-to-do-in-your-20s-to-become-a-millionaire-by-30-a7377801.html

 

 

 

Retirement plans on hold for many over 50s

A third of people aged over 50 who are employed in the private sector are now planning to retire later than they previously hoped, Aviva’s latest Working Lives report reveals.

The 2016 report – which comprises research among UK private sector employers and employees – has a particular focus on employees aged over 50, following the end of compulsory retirement and with the first anniversary of the ‘pension freedoms’ approaching.

In particular, the Aviva Report survey asked people what age they hoped they would retire at, before they turned 40. Now, aged over 50, more than one in three (36%) admitted they would be retiring later than they thought – by an average of eight years. Among those who will now retire later than hoped, the report found a variety of reasons for people to postpone their retirement plans:

Not saving enough into a pension – 46%
The amount available through the state pension – 32%
I have debts to pay off (including mortgage) – 24%
Feeling that I still have a lot to offer at work – 21%
The level of enjoyment/satisfaction I get from my work – 20%
My employer wants to keep me on – 13%
Position of my partner – 13%
I have children who need financial support – 8%
I have elderly relatives who need financial support – 1%
Other – 10%
None of these – 3%
Don’t know – 2%

The Working Lives report also reveals a gap between employers’ and employees’ views on the impact of the pension freedoms, as the first anniversary of their introduction in April 2015 approaches. Over one in five (22%) employers think the freedoms could result in their employees having to work longer to make up for a shortfall in savings if they use part of their pension before retirement. At the same time, almost one in three (32%) employers are concerned they will lose valuable skills because people will retire earlier due to the freedoms.

However, these fears may be unfounded as the vast majority of employees aged 50 and above do not intend to alter their plans because of the pension reforms. Only 8% highlighted that the freedoms will result in them retiring earlier, contrasting with the concerns employers have around loss of skills. One in ten (11%) employees over the age of 50 now think they will retire at a later date because of pension freedoms, while 9% still remain unsure as to what the eventual impact of the freedoms will be upon their retirement plans. Seven in ten (71%) stated they have no plans to retire or that the pension freedoms have not affected their expected retirement date.

Aviva’s Working Lives report also questioned 500 private sector businesses of different sizes about a number of issues, including how prepared they are to deal with changing retirement patterns following the scrapping of the Default Retirement Age and the introduction of pension freedoms. The findings suggest the majority of businesses do not have plans in place, and that they are less prepared for staff retiring later (just 25% have plans for this) than they are for staff retiring earlier (29% have plans in place).

Even among large companies (250+ employees), less than half (42%) have plans in place should their employees retire later than expected, compared to 14% across both small and medium sized businesses. Likewise, only 48% of large businesses have plans to cope with staff starting to retire sooner than expected, compared to just 17% of medium sized businesses and only 15% of small businesses.

With many over-50s facing a later retirement than they hoped, the Working Lives report nevertheless found encouraging signs that levels of job satisfaction were highest among those aged over 65. A large majority (86%) of private sector workers in that age group said they enjoy their work, compared with just 57% of those aged 18-64. A similar proportion (85%) also said they get a sense of satisfaction from work, while 81% reported being valued by their employer – again, much higher than the younger age groups combined (57%). This backs up the suggestion that there are positive reasons for people wanting to stay on at work.


Sources: www.aviva.co.uk (Published article: 2016/03/22)

building your financial future

The New Pension Freedoms Checklist: Four Things You Must Do Before Making Any Decision About Your Savings

The new pension freedoms are great news for savers, with more flexibility and options for retirement now available. However, the freedoms also come with a level of risk, particularly for that first wave of savers looking to exercise their new rights in the next twelve months or so.

The main recommendation for savers is to seek independent financial advice. An adviser will be able to talk you through your options and ensure you get value for money. Whilst you weigh up your decision though, here are four more things to add to your checklist and consider carefully alongside any decision you make about how you’ll receive your pension income.

Make sure you factor in, but don’t overestimate, your state pension

It is important to remember that, alongside your private pension savings, you will also probably benefit from a state pension in your retirement. Where once it might have been tempting to rely on the state pension, now it is more readily expected that your personal savings will be your main source of income in retirement and the state pension a nice ‘bonus’.

With this as your model, it’s important to remember the income the state pension will give you when planning for your retirement, but at least equally important to not overestimate the contribution the state will make. Factor a realistic figure into your plans, alongside the income your personal pension will generate.

Don’t underestimate your lifespan

It is very common for retirees to underestimate their own lifespan and, by extension, the amount of money they will need throughout their entire retirement. Whilst it is, of course, a difficult factor to put any sort of prediction on, it is vital that you plan for a long and happy retirement, rather than risk trying to ‘get away’ with having less capital available to you. When planning your retirement income, make sure you’re planning for the long term!

Consider tax carefully

If you are looking at the new pension freedoms with some eagerness then don’t forget: whilst the taxation implications have been reduced, they have not been eradicated entirely.

After the first 25% tax free lump sum, withdrawals from your pension will be charged at your normal rate of income tax. If you are still earning an income, or if you make sizeable withdrawals in a tax year, then this could mean you enter the upper tax bracket.  Be very careful on how the provider tax the pension, you could be waiting some time to get back any over paid tax.

Of course, if what you are planning for your pension income requires this level of withdrawal, then it may well be worth that level of taxation, but take care and make sure you have planned for, and are aware of, the taxation implications that your actions will create.

Work out what you want to do with your money, rather than just trying to get the highest amount

Perhaps the most important point of all! Whilst money is important to each of us, ultimately it is merely an enabler. There is no better aid to a happy retirement than clearly planning how you want to spend your money: the things you want to buy, the experiences you want to have, the family you want to help.

Once you have planned what you want to do with your retirement, money decisions become much easier. Will accessing your pension through the new pension freedom arrangements help you get to where you want to go in your retirement? More so than any monetary factors, this is arguably the most important question for retirees to attempt to answer !

 

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How much money do I need?

Budgeting for retirement or as we like to say ‘ change of circumstances’ can be more difficult than budgeting whilst you’re still working. Some costs may increase, such as heating your home, and you’ll have to work out exactly how much income you will be receiving from your pension. The average British wage is about £26,000 – to replicate that in retirement you’d need a pension pot of more than £300,000. However, according to ‘Which?’ it’s unlikely that you’ll need as much money in retirement as you did while you were working, although the amount clearly depends upon your own hopes and expectations of how you will enjoy your life!

When sitting down to plan your budget, it’s a good idea to first get some idea of your current spending. A report by ‘Which’ suggests keeping three months’ worth of bank and credit card statements, payslips going back three months and three months of shopping receipts – remembering to factor in one-off spends like birthdays, Christmas, holidays and car repairs. Then work out where you think you’ll spend more once you’ve retired – because your situation is changing so will your spending habits. You’ll need to compare this with how much income you’ll be getting in retirement (from pensions, benefits or savings), to find out if there are any shortfalls.

The above simple plan is a long way off proper financial planning, but it should provide a handy starting point for indicating the income you might need in your retirement. Once you know that, we can set about working out exactly what you do need to make sure you can do everything you want in your later life.

It is also worth bearing in mind that the sums of money you spend on certain things can change for the better in retirement. The following are again good suggestions to start considering.

  • Have you paid off your mortgage? If so, that will significantly reduce your monthly spend. However, if you’re still renting in retirement, you’ll have to factor that cost into your outgoings when budgeting.
  • Have your children moved out? Raising a child until they’re 18 costs almost £220,000 in total – so your costs should come down significantly once they’ve flown the nest.
  • You’ll save on commuting. The average annual rail cost of commuting into London is £3,800, and that’s without factoring in parking at train stations.
  • Public transport. Over-60s get free off-peak travel on buses. And if you live in London, you can claim a Freedom Pass, which means you can use London’s public transport for free.

Some spending in retirement can typically go up, however:

  • Leisure spending – you’ll probably be spending more money on hobbies and holidays. Think about how many holidays you’ll want to take per year and remember to take advantage of senior discounts on dining out and theatre tickets.
  • Travel insurance – Which? research has found that people over 65 tend to pay more because statistically, they’re more likely to fall ill whilst on holiday. Shopping around will help secure you the best deal.
  • Heating. As you’ll be spending more time at home, the chances are bills will be higher. The Winter Fuel Payment, currently available to people born on or before 5 July 1952, could get you between £100 and £300 tax-free towards your fuel bills.

Planning for Retirement needs to go beyond this sort of initial informal research to fully include careful attention to Lifestyle Planning, but the above initial considerations should help you to start thinking about whether your current savings are going to be enough to do everything you want to do with your retirement.


Sources: www.which.co.uk (Published advice on the website: January 2015)

 

building your financial future

Saving a little bit more will go a long way

Many working age people in the UK could secure a financially comfortable retirement by making some small changes to their saving habits, according to new research published by the Department for Work and Pensions (DWP). While government action to transform British pensions has brought about radical improvements to the retirement prospects of future pensioners, millions are still not saving enough to ensure they can maintain their standard of living into old age – estimating that 11.9m people in the UK need only to make modest changes to safeguard their financial future.

The research finds that landmark reforms of the State Pension system, working to reinvigorate workplace pension schemes and efforts to help older job-seekers get back into employment, are all playing a crucial role in tackling the problem of under-saving. The introduction of the triple lock – the commitment to increase the state pension by whichever is highest out of earnings, prices or 2.5% – has also made a major impact.

Of the 11.9 million people who are saving too little, a large number of these are already on the right savings path and could safeguard their financial future by putting away just a little more. The analysis finds that of the 11.9 million, almost half are at least 80% of the way towards achieving their retirement income target, while only 8 per cent are less than 50% of the way there.

But with the government’s pension reforms having had the biggest positive impact on lower earners, the spotlight is now turning to people in middle and higher income groups, who are amongst the worst. While the problem exists amongst all income groups, it is people in the middle and higher income ranges who, statistically, now face the biggest income hit when they give up work.

The research finds that higher income groups could benefit significantly from higher contribution rates but recognises the danger that, if set too high, these could prove punitive for lower earners and encourage more people to opt out of workplace pensions entirely. On this basis, the DWP considers that further work is needed to consider pension contribution rates which strike the right balance between providing improved retirement outcomes for all but without having a detrimental impact on working life incomes.

The DWP research highlights three key factors leading to poor retirement income prospects:

  • Not having a full work history can result in a reduced entitlement to the State Pension (because of insufficient National Insurance contributions) as well as a reduced capacity for private pension saving. This factor is most typical amongst lower-income groups.
  • Not contributing to private pensions while in work, which is more typical of people in the middle-income groups.
  • Not contributing enough to private pensions to generate a large enough retirement income, which is more typical of people in the higher-income groups.

The research document sets out the scale of the savings challenge facing the UK, as the average age of the country’s population continues to rise. The number of people classed as under-saving is defined by a replacement rate which measures retirement income as a percentage of working age income.

The DWP research concludes that:

  • the maintenance of the triple lock guarantee – introduced by the government in 2010 – into future years will prevent the number of under-savers increasing further
  • further action to increase employment levels amongst people aged between 50 and State Pension age has an important role to play, as does discouraging people from opting out of workplace pensions
  • increasing contributions paid into workplace pensions could have a positive impact on reducing under-saving.

Sources: https://www.gov.uk/government/news/take-action-now-to-safeguard-your-retirement-pensions-minister

 

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Annuity review highlights importance of advice and shopping around

The startling headline finding from The Financial Conduct Authority’s (FCA) recent review of the annuities market proved to be the fact that some 80% of people who purchased an annuity from their pension provider could have received a better deal from an alternative source.

The report found that the annuities market was not working as it could for consumers, with many reporting that they found it difficult to review the suitability of the annuity offered by their pension provider, when compared to the alternatives available.

In monetary terms, the FCA found that, on average, retirees who buy an annuity from their pension provider miss out on around £71 per year. With the average length of retirement being around 19 years, that figure works out to meaning retirees are over £1,300 worse off: a figure that could represent a very nice holiday for many, an investment on behalf of the grandchildren or one of several other very rewarding ways to spend a retirement income.

As part of their findings, the FCA have launched a more in-depth review of competition within the annuities marketplace to assess how it could be better organised with consumers in mind.

The message though is clear: shopping around when purchasing your annuity can really benefit you in your retirement years and, if you find the marketplace too complex to navigate on your own, a financial planner may well be able to assist.

Taking account of your retirement goals and your current financial situation, we’ll look at your various options for living your desired lifestyle in retirement, including whether purchasing an annuity would be a suitable solution and, of course, then assessing which annuity would be best for you.

We’ll also be keeping a close eye on the FCA’s further review of the market, to see how it will impact annuities in the future and how that would work for consumers.


Sources: fca.org.uk

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Eastbourne the Sunshine Coast !

My First Week in Eastbourne – by Adrian Elliott – ISO Certified Financial Planner

Finally the paint has dried on the walls and the office is now open!

So how has my first week been?

We had a number of client meetings organised for this week and the reaction and feedback has been brilliant, they all loved the new office, especially the corporate colour chairs.  Oh and yes, the chocolate helped!

There have been a few teething problems, like deciding on cups, hence our company colour paper cups! Eco friendly of course, provided by Tidmas Townsend – shameless plug ! but thank you Mark !

Normally our business is generated from referrals, however, this week we were surprised that we had a couple of potential clients just walk in and ask for advice after seeing our signs courtesy of X-treme Print – yes I know another plug – but thank you Kerry

We’re all delighted with the response, mainly through social media and the people who have seen the project unfold and the journey I have been on leading from Reigate to Eastbourne – we always had the plan that Concept would have a new office in Eastbourne (who says planning does not work!)  Can I just take this opportunity to thank all those involved in making this happen – especially the team – without the team there is no dream !!

Finally ……..The commute to work now takes me 9 minutes as opposed to 90 minutes! Albeit I’ve now started canoeing to work!  Who says Eastbourne is the sunshine coast !!

We are looking forward to welcoming more people in to our new office and introducing our ‘Award Winning Firm, Concept Financial Planning.’

Adrian

building your financial future

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