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Saving for retirement: what’s the magic number

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.

Sources
https://www.thisismoney.co.uk/money/pensions/article-6449851/How-need-squirrel-away-golden-retirement.html

Pension drawdown in an era of long life expectancies

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.

Withdrawal rates

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.

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Sources
https://www.retirement-planner.co.uk/232530/tom-selby-life-expectancy-guessing-game

4 ways to live a happy retirement



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.

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Sources

Sources
https://www.theguardian.com/lifeandstyle/2018/oct/06/life-keeps-evolving-six-ways-to-have-a-happy-retirement

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

Post-Brexit trade uncertainty: A difficult time for British exports

For British companies who rely heavily on the E.U. export market, Brexit has been a nightmare, to say the least. Until recently, though, the full effects on British exporters have been unclear.

Some versions of Brexit currently under consideration by the cabinet could potentially cut U.K. exports by as much as a third, according to a study by a team of trade experts at the University of Sussex. The study also predicted that a fall in British exports would hit ‘Leave’ voting areas such as Sunderland, Coventry and Derby the hardest.

These areas are traditional hubs for British industry and could potentially see a massive rise in unemployment in the post-Brexit landscape. What’s more, the sectors that some in the government see as replacing industries hit by Brexit – such as design, marketing and hi-tech – as of now have little presence in these areas.

These industries tend to be located around London, the M4 corridor and Cambridge – regions that voted strongly against leaving the E.U., which could, ironically, be the least affected by the separation.

Even if Britain were to sign a free-trade agreement with every other major trade partner, some British industries would still be hit hard.

Food exports, for instance, would fall by 34% and textile exports would shrink by 30%, if the EU implemented protectionist trade policies against the E.U. In this scenario, overall manufacturing output would be cut by 13%.

Already, U.K. trade has begun to suffer from Brexit uncertainty. As many as 9,000 British firms chose either not to start exporting or stopped selling abroad in 2016 because of doubt around Britain’s trade position.

In the year after Brexit, exports fell by 1%, which may not seem like an alarming figure. However, trade commentators suggest that this will grow over time. This is due to the effect of British companies that would have become major exporters, but because of Brexit will never get a chance to explore new markets. As a lag period passes, this is expected to be felt hard and could potentially see the U.K. stagnate as a trade power compared to its competitors.

However, with the final Brexit agreement still highly contestable, the full effect of Brexit on British exports is anyone’s guess.


Sources
https://www.telegraph.co.uk/business/2018/07/29/britain-loses-thousands-exporters-trade-uncertainty/
https://www.theguardian.com/politics/2018/feb/07/brexit-manufacturing-exports-leave

how best to help your grandchildren finacially

Grandchildren & financesBeing a grandparent is an exciting time of life. You get all the enjoyment of doing fun activities with your grandchildren but can hand them back at the end of the day. Part of that pleasure is knowing that you can help them financially. Often you’re at a stage of your life where you’re comfortably off and in a position where you want to give a helping hand to the next generation.

The plus side of this is that you get the opportunity to make a real difference to your grandchildren’s lives. The downside is that the regulations around inheritance tax (IHT) can be confusing and the red tape overwhelming at times. By taking steps to find out what the rules are though, you can make life easier for family members and still be confident that you have enough money for your own retirement dreams.

One important consideration is the timing of your gift. If there’s a new arrival in the family, the financial needs will be very different than if it is to help older children. For example, the priority may be to help the newborn’s family move to a more spacious home or to help with private school fees for a primary school-aged child. Later on, it may be to help with driving lessons, pay for school or university fees or enable them to get on the housing ladder. You may decide you want to leave your money to your grandchildren in your will, in which case it is vital to plan your giving in advance in a tax efficient way.

IHT will be levied on your estate at 40% when you die, so if you’re giving money away now that will have an impact later. The nil-rate band is a threshold of £325,000 for the value of your estate. Anything above that will be taxed. Making monetary gifts can take the money out of the ‘IHT net‘ but remember this only applies for the seven years after you made the gift. It’s worth exploring some extra allowances such as being able to give £3,000 of gifts per tax year (your annual exemption) as well as an allowance for small gifts and wedding/birthday gifts.

There are a number of alternatives to make your gift. If the money is needed before age 18, a trust structure is a tax-efficient way to give money, while still giving you some control on how it is used. A Junior ISA can also be a good option as it grows tax-free, building up a fund for driving lessons or university fees. You can’t open the JISA on your grandchild’s behalf but you can pay into it up to their annual limit, currently £4,260. If they’re older, you might want to consider a lifetime ISA for a housing deposit. Again, you can’t open it for them as a Lifetime ISA can only be opened by someone between the ages of 18-39 but if your grandchild opens one, it’s a way for them to save up to £4,000 a year and get a 25 per cent government bonus on top.

Whatever you opt for, you’ll have the feel-good factor of helping the next generation in a way that is right for both you and them.


Sources
https://www.telegraph.co.uk/money/smart-life-saving-for-the-future/gifting-money-to-grandchildren/?utm_campaign=tmgspk_plr_2144_AqvY5NdHbz57&plr=1&utm_content=2144&utm_source=tmgspk&WT.mc_id=tmgspk_plr_2144_AqvY5NdHbz

6 top tips on how not to lose money from your pension each year

Keeping track of your pension can be difficult at the best of times, and if you have multiple pots it can seem nigh on impossible. Fortunately, we have some top tips to help.

First introduced in 2012, auto-enrolment made it compulsory for UK employers to automatically enroll their staff into a pension scheme, unless they opt out.

However, according to financial services firm Hargreave Lansdown, £600 million is being lost from this scheme each year.

This is because every time you change employer, you receive a new pension pot. Each time you start a new pension pot, you are charged between £20 and £80 in administrative fees. With the average worker changing jobs 11 times, over the course of a lifetime that adds up to a substantial sum.

Luckily, there are some simple steps you can take to avoid these extra charges and make sure that you are up to date with all your pension pots:

  1. Avoid having more pension pots than necessary. If you change employers, see if you can transfer your old pension across to the scheme in your new workplace. Sometimes employers will be happy to make contributions to your existing pension pot. If so, you can keep that one going and avoid any extra charges.
  2. Be mindful of where your money is. Never take for granted that the default fund your employer provides is the best one for you. It is important to see if your hard earned pension pot could be growing more elsewhere. There’s a chance you might be able to stake out a pension fund with fewer charges or a better investment return than your employer’s default pot.
  3. Remember to notify pension companies if you move house. If you have multiple pension pots, it is easier than you think to lose track of a pension fund, especially if the company can no longer contact you.
  4. Use the government’s pension pot finding service. Luckily, the government has an online service that allows you to find contact details for your own workplace or personal pension scheme. You can access this here.
  5. Check back through your paperwork. The majority of pension providers send an annual statement that includes the current balance of your pension, plus a projection of how much your pension will be worth when you reach retirement age. There’s a chance you might have held onto these and they may be lurking at the bottom of your filing cabinet. When you find the right document, you can contact the pension provider to update your details.
  6. Get in touch with your old employers. If you think you have lost a pension pot, get in touch with your old employers straight away. They should be able to help you find the details of any lost pension.

Keeping track of your pensions can, at times, feel overwhelming. We hope that our pension top tips help you manage your pensions and maybe even save you some money.

Sources

Brits lose £300 from their pension each year – here’s how to avoid it

is buying a state pension top-up worthwhile?

As part of your overall financial planning, one item that is worth considering is your state pension and whether you are on track to get the full amount. If not, it is possible to buy top-ups, which could boost your payout by £244 a year for life.

The 2017/18 voluntary payment, under the Class 3 National Insurance top-up scheme, costs £741 and will get you nearer to, or over, the threshold for the maximum state pension payout – currently £164.35 a week. Such an opportunity can be particularly relevant for those who have contracted out of part of the state pension at some point previously during their working life.

A word of caution though before proceeding – some people have paid the top-up only to discover that it made no difference to their state pension and subsequently struggled to get a refund from HM Revenue and Customs.

Some of the confusion arose because of the major shake-up in April 2016 when the single-tier pension system was introduced. Under the old system you had to have 30 years of NI contributions to get the full basic £122.30 a week pension, whereas under the new one you have to have 35 years. The top-up system was letting some people pay for extra contributions when to do so was futile.

Despite the problems encountered by some, Steve Webb, former Pensions Minister, says it is still worth investigating whether the additional payment would boost your future state pension. ‘Ironically, I think it would be really unfortunate if lots of people who could now top up for 17/18 at incredible value were put off doing so or didn’t do so because they were still unaware of the option, and where the decision to top-up or not is much more straightforward and less likely to go wrong,’ he said.

To know where you stand, the first thing to do is to get an official state pension forecast from the Government website. This will highlight whether you have any gaps in your National Insurance record of contributions. The top-up scheme can be particularly relevant for women who took time out to look after children.,

If you reached state pension age before 6 April 2016, the old system will apply to you (that’s men who were born before 6 April 1951 and women born before 6 April 1953). However, if you reached state pension age after 6 April 2016 (men born after 6 April 1951 and women born after 6 April 1953), the new system will apply.

You also need to work out if 2017/18 was a qualifying year for you – when you were under state pension age for the whole year and in which you either paid or were credited with enough NICs to earn one year towards your state pension entitlement.


Sources
http://www.thisismoney.co.uk/money/pensions/article-5770947/Should-buy-state-pension-up.html

5 pitfalls that put your retirement plans at risk

Imagine the scene; you’ve spent your life living frugally, saving efficiently and investing wisely. You enter your well-earned retirement financially secure and excited for the years ahead. The future could pan out in one of two ways; the first could lead to continued security and the financial freedom to enjoy your retirement as planned; the second might lead to the unfortunate disappearance of that security and the resulting stress that would involve.

The sad truth is that the things that lead people down the second path are usually easily avoidable; it’s rarely investment market declines which are the cause of a failed retirement strategy. Here are the five most common pitfalls that you can avoid through careful planning.

1. Helping too much
We all have a natural desire to help our loved ones, but helping too much can lead to harming our own plans. It’s all too common for people to dip into their retirement funds to give money to their children, grandchildren and other relatives. There’s nothing wrong with lending a hand or giving gifts, but you have to know what you can afford and stick to your limits. Don’t be afraid to admit you can’t help.

2. Buying a second home
Having your own little getaway or spending your winters in the sun may seem like a fantastic prospect, but it’s important to be realistic. A huge portion of your retirement capital can be tied up in owning a second home, and there are often unexpected costs involved. In the past you could count on property values to appreciate, but that isn’t true of many areas now. If you want a second home in retirement, make sure you have a substantial financial cushion.

3. Unmanageable debt
Debt can sometimes be considered a financial management strategy rather than something to steer clear of in retirement. Some financial advisers may recommend investing cash to earn a higher return than the interest rate of the debt, instead of paying off the debt altogether. It does, however, come with fixed expenses and if those expenses combine with unexpected expenditures and begin to exceed your fixed income, problems can arise. Avoiding debt during retirement where possible will help avoid financial uncertainty.

4. New business ventures
A lot of retirees choose to continue working and producing income in some way. Many may decide to start new businesses. If this is something you’re considering, be careful and separate most of your retirement assets from the business. Only risk capital that you don’t need to sustain your standard of living as a failing business can erode your nest egg quickly.

5. Absence of a spending plan
One of the easiest mistakes to make is not planning your spending. A lot of retirees don’t know how much money is safe for them to spend in the early years and still ensure they have enough capital to last into their later years. Surveys suggest that people believe they can spend 7% or more of their savings each year safely, however, financial planners and economists say the spending limit is closer to 4%.

Everyone’s optimal spending plan will vary and, ideally, you should revisit your estimates each year to make adjustments.

Sources
https://www.forbes.com/sites/bobcarlson/2018/03/27/the-5-ways-retirement-plans-are-most-likely-to-go-off-track/#6daba1056165

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/