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.
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.
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.
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.
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.
Being 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.
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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
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.