Inflation-proofing your portfolio

One of the biggest threats to the health of your investments.

The coronavirus (COVID-19) pandemic has had a dramatic effect on the global economy. Around the world, economic activity has dried up. Fewer consumers are buying and fewer companies are investing.

If you take the view that inflation will go up in the long term, it is worth considering whether your savings and investments could be affected. After all, you need your investments, and the income from them, to keep pace with inflation to maintain the value of your buying power.

Inflation over the past decade

When we think about concerns over inflation today, we have to consider how the world looked immediately before the coronavirus pandemic, as well as our wider experience with inflation over the past decade.

In the run-up to the COVID-19 pandemic, things were actually pretty quiet on the inflation front. In fact, you could argue that policymakers were more worried about inflation being too low, or persistently low, rather than any return to the 1970s.

Decline in demand across the economy

There are a number of factors driving down inflation at the moment. The social lockdown to help combat the spread of the virus is seeing us having to stay at home, meaning we have generally been spending less, which has led to a decline in demand across the economy. As elsewhere around the world, we have also been driving and travelling far less.

In addition, the price of oil has been a historic bellwether for the health of the global economy. The effect of lower oil prices feeding into lower costs of production for a wide range of goods will also push down inflation.

Spending could drive inflation higher

Despite unprecedented support from the UK Government to help workers and businesses, job security and consumer confidence has collapsed. Economic uncertainty and the threat of unemployment have left many less willing to spend and businesses less willing to invest in capital.

Unless the damage done to the economy ends up lasting, it’s likely we’ll see a pick-up in spending once there is some resumption of normality. Depending on how much demand is pent up, and how willing consumers and businesses are to part with their savings when we start to emerge from the crisis, the rise in spending could drive inflation higher.

Other possible inflationary pressures

Over the long term, there are worries about other possible inflationary pressures. Prices can also go up because there is less supply of products. The ongoing situation caused by the crisis is seeing significant disruption to trade, and some companies going out of business. This could also have the effect of constraining the supply of goods and competition in the global economy, contributing to higher prices at checkouts.

Due to the heightened degree of uncertainty in global markets, it is difficult to forecast the outlook for inflation with any certainty. Nonetheless, it is worth considering the possibility that inflation may rise to levels that have historically been more ‘normal’.

Including some protection against inflation

Investors may not be overly concerned in the short term about inflation, but a diversified portfolio should always include some protection against inflation, whether through holding shares in companies that have the ability to raise their prices over time, or more direct inflation-protecting assets such as inflation-linked bonds. Exposure to inflation-protecting assets should be seen as part of normal portfolio allocation, rather than as a response to the threat of higher inflation.

Inflation poses a threat to investors because it chips away at real savings and investment returns. Most investors aim to increase their long-term purchasing power. Inflation puts this goal at risk because investment returns must first keep up with the rate of inflation in order to increase real purchasing power.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

Risk of retirement longevity

Maximising investment returns over a longer life expectancy.

There are lots of variables in retirement: how long people will live for, the costs of goods and services they will need, interest rates available on their accumulated savings, and so on. But once you have retired, investing is anything but straightforward.

Your finances are a primary consideration, there’s no doubt about it. If you have insufficient income to pay your projected retirement expenses, or less surplus income than you anticipated, you could find yourself working years longer than you intended or facing a retirement lifestyle that may not be what you had in mind.

Protecting your income streams

Once you have retired, you’ll have to juggle finding safe investments to protect your income streams while not being so safe you risk running out of money in retirement. The fundamental point about investing after retirement is that you are speculating to accumulate with a pot of money that represents the main body of your financial wealth.

However, once in the retirement stage, retirees often find that their actual costs are lower than they had expected. This situation can be the result of a number of factors. For instance, many expenses that absorbed a significant amount of your income in your working years may not exist during your retirement.

Changing demands on a retiree’s income

Other demands on a retiree’s income may also have changed or have been eliminated. Even if you retire more gradually, working part-time or perhaps periodically, the accompanying work-related expenses may still be greatly reduced.
Depending on your life stage, taking into account your children’s ages and the age at which you retire, you may also have finished paying their education-related costs. Other important factors to remember are that, in many cases, you are simply not having to save for retirement anymore.

Enjoying a longer life

While it’s not a comfortable notion to think about, you also need to plan for the possibility that you may become disabled or incapacitated yourself during retirement. The reality is that enjoying a longer life can bring unexpected challenges such as illnesses, accidents and the effects of ageing, which can lead to additional expenses, including the cost of long-term care.
You may be familiar with the rule of thumb that states you will need 70% of your pre-retirement income to sustain your lifestyle in retirement. In practice, however, this rule may be too general to address the very specific circumstances of each person’s retirement. While this level of income may be adequate for some, the number of your dependents, your debt levels and your lifestyle aspirations can sway your needs significantly up or down.

Managing risk appropriately

A ‘thinking ahead’ mindset is very important in your retirement planning. Do you foresee changes in your approach to investment management decisions when you retire? It can be hard for some retirees to tone down their risk appetite when investing in retirement. They’ve had decades of practice at investing for growth, after all.

A properly diversified portfolio in retirement is key to maximising returns over a longer life expectancy while managing risk appropriately to avoid significant short-term losses. Retirees can take income from the conservative portion of their portfolios while allowing another portion to continue growing.

Facing another type of risk

While the risk of portfolio declines can’t be overlooked when investing in retirement, retirees also face another type of risk: the risk of running out of money in retirement. Even though we have low inflation today, it’s critical for retirees to keep up with inflation. Pressure on the Bank of England to boost the economy and push inflation back to its 2% target is expected to intensify.

Retirement investors who take an approach that includes equities throughout their savings years may also need to continue an element of this into retirement. If appropriate, some retirees may need to moderate the impulse to seek safe investments by including some growth-oriented ones in their portfolio, too.

Your own unique lifestyle needs

The challenge when investing after retirement is that no one investment or investment style can address the needs of a 30-year retirement. Each five-year segment, such as ages 65 to 70, or 70 to 75, has its own unique lifestyle needs and therefore investment needs.

Money invested in the first two or three segments, during which time retirement income needs are highly affected by the stock and bond markets and the sequence of returns, should be invested more conservatively than money invested in later retirement years.

Experiencing volatile returns

One of the most important aspects of successful investing in retirement is diversification. Holding funds in cash may be suited to some retirees planning to draw down their entire pot over a short period. However, it is highly unlikely to be suited to someone planning to draw down their pot over a longer period.

Diversifying investments across a number of different assets is important because it may help to reduce the risks of investing during this time of your life. By risk, we mean both that of losing money and that of experiencing volatile returns.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

YOUR EVENTUAL RETIREMENT INCOME MAY DEPEND UPON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATION.

Time to give your pension pot a boost?

Planning ahead for the financial future you want

Planning for retirement can be both exciting and daunting. It’s essential to structure your affairs to make sure you have enough money when you eventually retire. To give your pension pot a boost, one option to consider if your pension savings are more than your annual allowance is to take advantage of the ‘carry forward’ rules for unused annual allowances from previous years and still receive tax relief.

The carry forward rules were introduced from 6 April 2011 and allow your unused annual allowance to be carried forward from the three previous tax years. Where this can be very beneficial is for an individual who has received a large salary increase, whose profits have been good in a self-employed business, who has been made redundant or who is nearing retirement.

Very useful for high earners

Utilising carry forward can also be very useful for high earners who are affected by the tapered annual allowance, which was introduced in April 2016. The way the tapered annual allowance works is that anyone with an adjusted income of more than £150,000 per year has their annual allowance reduced by £1 for every £2 they earn over £150,000, up to a maximum reduction of £30,000.

To be able to carry forward unused annual allowance from a previous tax year, you must have been a member of a registered pension scheme at some point in that tax year (a ‘member’ includes active, deferred and pensioner members). This can apply even if no contributions were made during that year or if there was a nil pension input amount.

Maximum allowable contribution

To take advantage of carry forward rules, you must make the maximum allowable contribution in the current tax year (£40,000 in 2019/20). You can then carry forward any unused annual allowances from the three previous tax years.

The amount of annual allowance that you can carry forward will depend on how much of your annual allowance you used in the previous three tax years. When assessing how much of your annual allowance you used in previous tax years, you need to include the total value of the contributions you made to your pension, any contributions made by your employer, and the tax relief you received from HMRC.

Tax year Annual allowance

2016/17 £40,000
2017/18 £40,000
2018/19 £40,000
2019/20 £40,000

Automatically carry forward any unused annual allowance

Carry forward cannot be used for any year that an individual was not a member of a registered pension scheme. It’s also worth noting that any contribution made using carry forward does not need to be made to the same registered pension scheme that an individual was a member of in the previous year.

It’s possible to carry forward any unused annual allowance automatically. There’s no requirement to make a claim to HMRC to carry forward any unused allowance, and there’s no need for the details to be included on a self-assessment tax return if there’s no annual allowance charge due.

From 6 April 2015, the Money Purchase Annual Allowance (MPAA) was introduced. This reduced the annual allowance in certain circumstances. An individual cannot utilise carry forward if they have triggered the MPAA (unless they have ongoing accrual in a defined benefit scheme).

ACCESSING PENSION BENEFITS EARLY MAY IMPACT ON LEVELS OF RETIREMENT INCOME AND YOUR ENTITLEMENT TO CERTAIN MEANS TESTED BENEFITS AND IS NOT SUITABLE FOR EVERYONE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

TAX RULES ARE COMPLICATED, SO YOU SHOULD ALWAYS OBTAIN PROFESSIONAL ADVICE.

A PENSION IS A LONG-TERM INVESTMENT.

THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.

E DEFINITIONS OF A CRITICAL ILLNESS. THE DEFINITIONS VARY BETWEEN PRODUCT PROVIDERS AND WILL BE DESCRIBED IN THE KEY FEATURES AND POLICY DOCUMENT IF YOU GO AHEAD WITH A PLAN.

Portfolio diversification

Don’t put all your eggs in one basket.

Portfolio diversification is the foundational concept of investing. It’s a risk management strategy of combining a variety of assets to reduce the overall risk of an investment portfolio.

Traditional wisdom says: don’t put all your eggs in one basket. By ensuring your portfolio is well diversified across different asset classes, geographies, styles and size, you spread your risk exposure. If something goes wrong with one security, it only accounts for a small proportion of your investments and therefore won’t be too detrimental to your overall wealth.

Lowering volatility

The ultimate aim of portfolio diversification is to lower the volatility of a portfolio because not all asset categories, industries or stocks move together. By holding a variety of non-correlated assets, you can reduce specific investment risk.

Diversification is also important because investing in markets can be volatile and unpredictable. In practical terms, diversification is holding investments which will react differently to the same market or economic event. It’s also your best defence against a single investment failing or one asset class performing poorly.

Smoothing out returns

When the economy is growing, stocks tend to outperform bonds. But when things slow down, bonds often perform better than stocks. By holding both stocks and bonds within your portfolio, you reduce the chances of your portfolio being subjected to corrections when markets swing one way or the other.

Diversification also safeguards you against adverse market cycles and reduces volatility. In other words, by owning a large number of investments in different industries and companies, industry and company-specific risk is minimised. This decreases the volatility of the portfolio because different assets should be rising and falling at different times, smoothing out the returns of the portfolio as a whole.

Different asset classes

To diversify well, you need to invest across different asset classes and within different options in an asset class. If most of your money is in one or two asset classes, it may be prudent to consider other asset classes. Then, within each asset class, make sure your money is invested across the different options available. The three simple ways to diversify your portfolio broadly are by investing across asset classes, within an asset class and internationally.

Setting the right asset allocation for your financial goals and personal specifications depends on a number of factors. These include your investment time horizon and what you are going to use the money for. If you want to grow the money, you will need to take on some risk; if you are looking to preserve it, you will need to limit risk.

Time horizon and goals

Diversification is also important regardless of your time horizon and goals. Any time you’re investing in the stock market, you should aim for a diversified portfolio. As your goals or time frames change, the levers to shift should be determined by how aggressively that diversified portfolio is built. Investments allocated to a long-term goal can lean more heavily on stocks, for instance, than those geared towards near-term goals.

An easy way to determine if your portfolio is diversified is by looking at your current performance. Diversified investments won’t move in the same direction at the same time. If some of your investments are up while others are down, you’ve got diversification.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE TAX BENEFITS RELATING TO INVESTMENTS MAY NOT BE MAINTAINED.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

Pension consolidation

Simplifying and maximising retirement benefits

The employment landscape has evolved significantly over the last few decades, and changing jobs multiple times before retirement is now very much the norm. As a result, many people have multiple pensions set up, as they have been automatically enrolled into a new pension scheme each time they have started a new job.

When you have several pension pots, things can become complicated. If you have accumulated a number of pension pots over the years from different employers, consolidating them could be a sensible move.

Bringing together all your different pension pots

You may have pensions that were set up a long time ago and are no longer suitable for your requirements, or you could be over-paying for services such as life insurance that are not required. Monitoring the performance of multiple pensions is also time-consuming. Bringing together all your different pension pots can give you more control over your money and provide a much clearer picture of your overall pension savings.

Consolidating your pension pots enables you to bring together all your different pensions and makes it easier to manage your money. Less time will be needed to monitor each different pension and check performance, and there is likely to be considerably less paperwork once your pensions are combined. You are also likely to get a better understanding of whether your retirement planning strategy is on track.

Easier to determine your overall asset allocation

Crucially, having all your pension savings in one place should also make it far easier to determine your overall asset allocation. If your pension savings are spread out over many different providers, it can be hard to keep track of your exact asset mix and know how much risk you are taking on. If you have a plan that was set up a long time ago, you may not even know what investments you currently hold.

Additionally, consolidating your pensions can give you the opportunity to lower costs if you switch to a more cost-effective pension provider, or boost your investment options if you transfer to a more flexible provider.

A pension consolidation could be the appropriate action to take if:

• You have a number of pension pots and want more control over your money
• You have a number of pension pots and want less hassle
• You are unhappy with the performance of a current provider
• You are unhappy with the choice of investments offered by a current provider
• You are paying high fees with a current provider

However, a pension consolidation is not always the best option. It may not be sensible to consolidate your pensions if:

• You are a member of a defined benefit pension scheme. If you transfer out of this type of pension, you’ll be giving up guaranteed benefits and potentially taking on greater risks
• You have a pension that comes with valuable benefits. For example, a pension may allow you to buy a higher income in the future via a ‘Guaranteed Annuity Rate’
• You have a pension provider that charges high fees to transfer to another provider

Before doing anything, check what you have

Do you know how many pensions you have and what they offer? Do they, for example, have particular death benefits or financial guarantees, and do they let you take your pension money how and when you want? We can ascertain what benefits and guarantees there are that you would not want to give up and ask your pension providers for up-to-date information.

Combining pensions isn’t right for everyone. If you have any pension pots worth more than £30,000, you may have to take financial advice – and it’s such an important decision that you may want to take advice even if the amount is less.

Make your own decisions about your pension savings

There are a number of ways that pension pots can be consolidated. For example, one strategy is to pick one of your pension pots and transfer the other pensions to this pot. This could make sense if you are happy with the services offered by one provider in particular.

Alternatively, you could bring all your pensions together into a Self-Invested Personal Pension (SIPP) – a government-approved personal pension scheme which allows you to make your own decisions about how your pension savings are invested.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

TAX RULES ARE COMPLICATED, SO YOU SHOULD ALWAYS OBTAIN PROFESSIONAL ADVICE.

A PENSION IS A LONG-TERM INVESTMENT.

THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

Focus on long-term horizons

Time in the market, not timing the market

During this difficult time, fear and worry are understandable, particularly as the coronavirus (COVID-19) outbreak led to the biggest daily drop in the FTSE 100 since the financial crisis of 1987. Trying to second-guess the impact of events such as the coronavirus or the recent stock market volatility – or even attempting to make a bet on them – rarely pays off. Instead, investors who focus on long-term horizons – at least five to ten years – have historically fared much better.

We all have different objectives in life and need different strategies to help achieve them. Sensible diversification – owning a mix of assets, including shares, bonds and alternative investments such as property – can help protect investors over the long term. When one area of a portfolio underperforms, another part should provide important protection.

Risk tolerance and time horizon

If you have a well-diversified portfolio, then it’s more important than ever to stay the course. You have a strategy in place that reflects your risk tolerance and time horizon, so remain committed. This will help you navigate through periods of uncertainty when some investors are panicking or acting out of fear. Volatility is not all bad, as long as you are prepared to take advantage of the unique opportunities it brings.

In volatile markets, it is perfectly normal for investors to become nervous, question their investment approach and concentrate on the potential for short-term losses over their longer-term investment strategy. Be aware of the psychological effect this type of volatility has on you as an investor, and resist the urge to be reactive.

Proper diversification and perseverance

It’s important to understand that this movement is not all bad for investors. Some commentators may talk about volatility as a detriment to markets and investors, but fail to discuss the opportunities that arise for investors during periods of market volatility.

No one knows how severe any market turbulence will be or what the markets will do next. It could be over quickly or become more protracted. However, no matter what lies ahead, proper diversification and perseverance over the long term are very important.

Ups and downs of different types of market conditions

It’s likely that the coronavirus will continue to have an impact on markets over the coming months and even years. However, major events causing markets to fall, particularly in the short term, is something we’ve seen time and time again. And it doesn’t mean that markets won’t recover. History shows again and again that the ups and downs of different types of market conditions are part and parcel of investing.

The key is to remain calm when stock markets fall. Don’t panic. Don’t frantically sell. If you can avoid it, don’t even log into your investment account. At moments like this, the skills and experience of professional financial advisers come into their own. Not only do we have the experience of dealing with different types of market conditions, but we can also help to take the emotion out of your decisions.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

Coronavirus impact on the global economy

It’s more important than ever to stay the course

The coronavirus (COVID-19) outbreak is first and foremost a human tragedy, affecting hundreds of thousands of people. It is also having a growing impact on the global economy. The markets have been extremely volatile as investors weigh the effect of the coronavirus against measures aimed at easing its economic impact. Therefore, it’s hard to say how this will affect investments in the short term.

Even with events like the coronavirus and global market volatility dominating the headlines, the key is to keep calm and remember that ups and downs are a normal function of markets, and part and parcel of investing. Bear markets are a fact of any investor’s life. Single-day volatility will continue to be common, and we can expect choppy markets as investors and firms react to the ongoing pandemic.

Recalibrating the markets’ outlook

If the markets follow the pattern established over the past few months, sudden market drops have been followed by similarly acute intra-day upswings as the markets absorb the news and recalibrate their outlook.
What we’ve recently been experiencing is global stock market lows not seen since the 1987 market crash – and as a consequence, many hard-hit companies have laid thousands of employees off. However, it’s important not to let global uncertainties affect your financial planning for the years ahead.

‘Prepare, don’t predict’ approach

When markets look worrying, a ‘prepare, don’t predict’ approach can often be the best strategy. Understandably, market falls can be unnerving and make you question your investments. A few months in, it is still hard to grasp the scale and scope of COVID-19’s global impact. A third of the world population has been under some sort of ‘lockdown’. Over 200 countries have been affected, and the number of new cases and deaths in many places has grown exponentially. All the while, a second crisis in the form of an economic recession is underway.

The increasing concerns surrounding the coronavirus outbreak pandemic have had a significant impact on markets around the world. However, performance chasing can be a costly mistake not only due to the narrow investment choices it encourages, but also due to the higher costs and taxes incurred. Overall, investors can end up selling low, buying high and, importantly, missing out on creating long-term value.

Financial planning for the years ahead

Remember that the overall direction of developed stock markets is a relentless and continual rise in value over the very long term, punctuated by falls. It’s important not to let global uncertainties affect your financial planning for the years ahead. Individuals who curtail their investment planning, particularly during market downturns, often miss out on opportunities to invest at lower prices.

Such volatility is less worrying if you take a longer-term view. It’s important to stick to your strategy and keep moving ahead consistently by spreading risk and growing your wealth. Volatility in stock markets understandably makes investors nervous. However, on the flipside, not all volatility is bad – without volatility, stock prices would never rise.

Planning for tomorrow

Will my retirement income be enough to live on comfortably?

The questions our clients almost always ask us are: ‘Will I be able to retire when I want to? Will I run out of money? How can I guarantee the kind of retirement I want?’

Worryingly, it’s been well documented that many Britons aren’t saving enough in their pension for their retirement. Figures published by HM Revenue & Customs (HMRC)[1] in September 2019 show that the annual average contributions that every individual makes decreased in 2017/18 compared to 2016/17.

Saving enough money for retirement

It’s never too early to start planning for your future. When planning for retirement, the truth is that the earlier you start saving and investing, the better off you’ll be, thanks to the power of your money compounding over time. It’s like a snowball: the further up the mountain it rolls down from, the more snow it picks up, and the bigger the snowball is by the time it reaches the bottom. Put simply, this is what happens to your money.

However, given the difficulty of precisely timing market peaks and troughs, market downturns can have an impact on the value of your retirement pot which is directly dependent on the value of the investments your pension fund owns.

A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.

There are steps that you can take to improve your pension prospects, no matter what your age.

We can help you determine which retirement income methods may be best for you based on your personal needs and goals. These are some basics you need to know.

State Pension

The State Pension is a weekly payment from the Government that you can receive once you reach State Pension age. In order to qualify for the State Pension, you need to make National Insurance contributions. If you reached State Pension age before April 2016, you’ll be receiving the basic State Pension, plus any additional State Pension you may have built up. Those who hit State Pension age after April 2016 will receive the new single-tier State Pension.

Both the basic and single-tier State Pension are protected by something called the ‘triple-lock’ guarantee. This means that they rise each year by the greater of annual CPI inflation (announced in September every year), average earnings growth, or 2.5%.

From April 2019, the State Pension increased by average earnings growth, which came in highest at 2.6%. If you’re entitled to the full new single-tier State Pension, your weekly payments in the current tax year are £168.60 a week – for this, you’ll need to have 35 years of NI contributions.

The State Pension is unlikely to provide a substantial income in retirement. That’s where a private pension can make a big difference.

Pension tax relief

The Government encourages you to save for your retirement by giving you tax relief on pension contributions. Tax relief has the effect of reducing your tax bill and/or increasing your pension fund. However, at the time of writing this article, the way pension tax relief works is reportedly under review by the Treasury.

You can receive tax relief on private pension contributions worth up to 100% of your annual earnings. Since the tax relief you receive on your pension contributions is paid at the highest rate of Income Tax you pay, the higher your rate of tax, the more you could receive.

The Welsh Government now has the power to set Income Tax rates and bands from 6 April 2019, but has opted to keep these the same as England and Northern Ireland for tax year 2019/20.

England/Wales/Northern Ireland

Basic-rate taxpayers receive 20% pension tax relief, for example, a contribution of £100 from your salary into your pension would cost you £80, with the Government contributing the other £20 – the amount it would have taxed from £100 of your salary
Higher-rate taxpayers can claim 40% pension tax relief, for example, a contribution of £100 costs you £60, with the Government adding £40
Additional-rate taxpayers can claim 45% pension tax relief, for example, a contribution of £100 costs you £55, with the Government adding £45

Scotland

Starter-rate taxpayers pay 19% Income Tax but get 20% pension tax relief
Basic-rate taxpayers pay 20% Income Tax and get 20% pension tax relief
Intermediate-rate taxpayers pay 21% Income Tax and can claim 21% pension tax relief
Higher-rate taxpayers pay 41% Income Tax and can claim 41% pension tax relief
Top-rate taxpayers pay 46% Income Tax and can claim 46% pension tax relief

Annual allowance

Anyone earning less than £40,000 would only be able to obtain tax relief on a grossed up pension contribution equal to their gross income. Nobody actually pays tax on their pension contributions as such.

Contributions are made by people net of basic-rate tax, and the product provider grosses it up by adding a further £20 to every £80 that the individual pays. If this process results in the individual receiving more tax relief than they are entitled to, HMRC will claw it back further down the line.

Your annual allowance applies to all of your pensions if you have more than one. This includes the total amount paid into a defined contribution scheme in a tax year by you or anyone else (for example, your employer) and any increase in a defined benefit scheme in a tax year.

If you use all of your annual allowance for the current tax year, you might be able to carry over any annual allowance you did not use from the previous three tax years.

Your annual allowance will be lower if you flexibly access your pension. By accessing the taxable element of your pension, it triggers the ‘money purchase annual allowance’ (MPAA) rather than the tax-free cash pension commencement lump sum (PCLS). An individual could take their tax-fee cash from a pension arrangement and not trigger the MPAA.

For example, this could include taking cash or a short-term annuity from a flexi-access drawdown fund or taking cash from a pension pot (‘uncrystallised funds pension lump sums’).

The MPAA is £4,000 and is triggered by flexibly accessing benefits. If you have a high income, you’ll have a reduced (‘tapered’) annual allowance if both your ‘threshold income’ is over £110,000, or your ‘adjusted income’ is over £150,000.

If you go over your annual allowance, either you or your pension provider must pay the tax. HMRC does not tax anyone for going over their annual allowance in a tax year if they retired and took all their pension pots because of serious ill health or have died.

HMRC[1] figures published in September 2019 show that during 2017/18, 26,550 taxpayers reported pension contributions exceeding their annual allowance through self-assessment. 2016/17 was the first year affected by the tapered annual allowance; the total value of contributions reported as exceeding the annual allowance was £812 million in 2017/18.

Lifetime allowance

You usually pay tax if your pension pots are worth more than the lifetime allowance. This is currently £1,055,000. You might be able to protect your pension pot from reductions to the lifetime allowance. If you’re in more than one pension scheme, you must add up what you’ve used in all pension schemes you belong to.

A statement from your pension provider will tell you how much tax you owe if you go above your lifetime allowance, and your pension provider will deduct the tax before you start receiving your pension.

If you die before taking your pension, HMRC will bill the person who inherits your pension for the tax. The rate of tax you pay on pension savings above your lifetime allowance depends on how the money is paid to you – the rate is 55% if you receive it as a lump sum and 25% if you receive it in any other way (for example, through pension payments or cash withdrawals).

In April 2016, the lifetime allowance was reduced. You can apply to protect your lifetime allowance from this reduction. Tell your pension provider the type of protection and the protection reference number when you decide to take money from your pension pot. You can also inform HMRC in writing if you think you might have lost your protection.

You may also have a reduced lifetime allowance if you have the right to take your pension before the age of 50 under a pension scheme you joined before 2006.

In 2017/18, there were 4,550 counts of lifetime allowance excess charges paid. The total value of lifetime allowance charges paid by schemes in the tax year was £185 million – a 28.5% increase from £144 million in 2016/17 – according to HMRC[1] figures published in September 2019.

Source data:
[1] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/836637/Personal_Pensions_and_Pensions_Relief_Statistics.pdf

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

TAX RULES ARE COMPLICATED, SO YOU SHOULD ALWAYS OBTAIN PROFESSIONAL ADVICE.

THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND UPON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATION.

Top 4 tips for good tax planning

What should I consider before the end of this tax year?

The end of the 2019/20 tax year is fast approaching, and there are a number of valuable allowances and reliefs that will be lost if they are not used before the deadline.

These opportunities include, but are not limited to, four important areas of tax planning. We’ve summarised these allowances below and suggest that if appropriate to your particular situation, these areas should be reviewed before 5 April 2020.

1. Take your ISA contributions to the max

The term ‘ISA’ stands for ‘Individual Savings Account’, which allows you to save tax-efficiently into a cash savings or investment account. With a Cash ISA or a Stocks & Shares ISA (or a combination of the two), you can save or invest up to £20,000 a year tax-efficiently. Your ISA allowance doesn’t roll over into a subsequent tax year, so if you don’t use it, you’ll lose out forever.

If you are in a position to, it may make sense for you and your spouse to take advantage of each other’s ISA allowance, particularly if one of you has more financial resources than the other. That way, you can save (in the case of Cash ISAs) or invest (in the case of Stocks & Shares ISAs) up to £40,000 tax-efficiently in the current tax year.

Also, 16 and 17-year-olds actually have two ISA allowances, as they’re able to open a Junior ISA (once they have transferred their Child Trust Fund [CTF] to their Junior ISA and closed the CTF), which for 2019/20 has a limit of £4,368, as well as an adult Cash ISA. This means that you could put away up to £24,368 in your child’s name tax-efficiently this tax year.

People aged 18–39 can open a Lifetime ISA, which entitles them to save up to £4,000 tax-efficiently a year until they’re 50. The Government will top up the savings by 25%, up to a maximum of £1,000 a year.

Viewing your and your spouse’s allowances as one will allow you to make the most of these tax advantages.

2. Make the most of your pension tax reliefs

Now is also the time to check you are taking full advantage of your pension tax reliefs and allowances. Normally, between you and your employer, you can contribute a maximum of £40,000 into your pension in a tax year (this is called your ‘annual allowance’). If you earn less than £40,000 a year, tax relief will only be available on contributions with a gross equivalent equal to your income. However, for high earners with a taxable income of more than £150,000 per year, this is tapered downwards.

If you don’t manage to make full use of your £40,000 pensions annual allowance this tax year, you can carry it forward for up to three years. For example, in the current 2019/20 tax year, you could carry forward unused contributions from 2016/17, 2017/18 and 2018/19, but the clock re-starts on 6 April this year.

3. Tackle the ongoing issue of Inheritance Tax

Inheritance Tax (IHT) is usually payable at 40% on the portion of an estate that exceeds the £325,000 nil-rate band (NRB). Like the NRB, the unused percentage of the residence nil-rate band (RNRB) can be transferred between spouses and registered civil partners.

The RNRB is on top of the NRB, allowing individuals to pass on a qualifying residential property to their direct descendants. The maximum RNRB is £150,000 this year, and next year a couple will be able to combine their NRB and RNRB allowances to pass on property worth £1 million free of IHT. The RNRB is reduced by £1 for every £2 that the value of the net estate exceeds £2 million.

You can act at any time to help reduce potential IHT. However, gifting money is an area that is subject to an annual limit, which runs from the start of the tax year, and could be worth adding to your year-end to-do list. Tax exemptions released through gifting should form a key part of IHT planning.

The annual allowance means you can gift up to £3,000 each year, exempt from IHT – so as a couple, you can make £6,000 worth of gifts. It can also be carried forward for one year.

You can give as many gifts of up to £250 to as many people as you like – that is, unless the person has already received a gift equating to the annual £3,000 exemption. Some types of gifts, such as wedding gifts or gifts to help with living costs, can also be given tax-free.

However, another factor to consider is the legislation around IHT, which could be subject to change in the near future. The Office of Tax Simplification is currently undertaking a significant review that could inform forthcoming policy decisions, so this year – before any changes come into force – reviewing your IHT plans, including gifting, should be a priority.

This is a complex area with qualifying conditions and requires expert estate planning advice.

4. Plan to reduce a Capital Gains Tax bill

Capital Gains Tax (CGT) is a tax on the profits you make when you sell something such as an investment portfolio or a second property. Everyone has an annual allowance of £12,000 (in 2019/20) before CGT applies.

The allowance is for individuals, so couples have a joint allowance for 2019/20 of £24,000. If appropriate to your particular situation, it might be worth considering transferring an asset into your joint names so you both stay within your individual allowances.

Any gains in excess of the allowance are charged to CGT at either 18% (basic-rate taxpayers) or 28% (higher-rate taxpayers), depending on the individual’s other total taxable income in the year the gain arises.

An important thing to remember with this aspect of taxation is that any losses you make on sales can be offset against your capital gains for CGT purposes.
Currently, CGT on the sale of a residential property, other than your main residence, is payable under self-assessment and will not be due until 31 January following the end of the tax year. This will change with effect from 6 April 2020, when payment of CGT from the sale of such a residential property will be required within 30 days of the date of sale/completion.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS.

ANY LEVELS AND BASES OF, AND
RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE, AND THEIR VALUE DEPENDS ON YOUR INDIVIDUAL CIRCUMSTANCES.

TAX RULES ARE COMPLICATED, SO YOU SHOULD ALWAYS OBTAIN PROFESSIONAL ADVICE.

THE VALUE OF INVESTMENTS CAN FALL AS WELL AS RISE. YOU MAY NOT GET BACK WHAT YOU INVEST.

Beware of pension fraudsters

Safeguard your hard-earned retirement savings from COVID-19 scammers

Fraudsters are exploiting fears over the COVID-19 pandemic to target pension savers and investors. The Pensions Regulator, the Financial Conduct Authority (FCA) and the Money and Pensions Service have issued a joint statement urging people not to make rash pension decisions in the wake of the global pandemic, as criminals try to exploit public fears over the market turmoil to dupe victims out of their cash.

Persuading you to transfer your pension pot

Scammers will make false claims to gain your trust – for example, claiming they are authorised by the FCA or that they don’t have to be FCA-authorised because they aren’t providing the advice themselves, or claiming to be acting on the behalf of the FCA or the government service Pension Wise.

Scammers also design attractive offers to persuade you to transfer your pension pot to them (or to release funds from it). It is then often invested in unusual and high-risk investments like overseas property, renewable energy bonds, forestry, storage units; or, invested in more conventional products but within an unnecessarily complex structure which hides multiple fees and high charges; or stolen outright.

Fraudsters look to exploit people’s anxieties and fears

Attempts to scam personal data and monies are likely to increase during the COVID-19 pandemic and economic downturn as fraudsters look to exploit people’s anxieties and fears. You need to be aware of receiving emails, calls or texts from criminals impersonating investment companies, insurers, pensions providers and other organisations to trick you into providing personal or financial information or money.

Cold calls about your pension – it is illegal for firms to contact you out of the blue about your pension, and you should hang up. The caller may offer to help you access your pension before age 55, or offer you a ‘free pensions review’.
Phishing emails – these attempt to trick people into opening malicious attachments or reveal personal or financial information.
Ghost brokers – fraudsters may attempt to use an insurer’s branding to promote and sell fake or invalid pension or investment products which may claim to offer COVID-19 protection.

What should I look out for?

Be suspicious of offers that seem too good to be true

Do not feel pressured or agree to offers or deals on insurance, pensions or investments

Check the credentials of the person you are dealing with by getting a name and contact details. You can check the financial service register to make sure you are dealing with a regulated company. Hang up and call them back on details you can verify

Never give your personal details out, such as an insurance or pensions policy number or other account details

Always use contact details on your documents provided by your insurer or pension provider

Don’t assume all online sites are genuine