Planning ahead helps ensure that you’re on track

You work hard to enjoy your current lifestyle, but are you doing enough to ensure that you will continue to enjoy it in retirement? Many of us live for today, but saving into a private pension plan can help you retire sooner rather than later.

The term ‘private pension’ covers both workplace pensions (also known as ‘occupational’ or ‘company’ schemes), arranged by your employer; and ‘personal pensions’, which you manage yourself. There is no restriction on how many pensions you can have, and some people will have both.

Am I still saving enough for retirement according to my current circumstances?

Private pensions, often referred to as ‘personal pensions’, provide a way for you to save for retirement so that you’ll have an income to supplement the amount you’ll receive from the State Pension.

They are generally ‘defined contribution’ plans, which means any payments you make are invested. The amount you end up with at retirement depends not only on how much you’ve paid in, but also on how your investments have performed and the level of charges. We can assess your current retirement goals and calculate the target level of income you’ll require to achieve them.

Don’t forget: if you have a workplace private pension, both you and your employer will make contributions, boosting the amount you end up with at retirement.

Can I rely on the State Pension to provide a substantial income in retirement?

The State Pension is a regular income paid by the UK Government to people who have reached State Pension age. The State Pension changed on 6 April 2016. If you reached the State Pension age on or after this date, you’ll now be getting the new State Pension under the new rules.

The new State Pension is designed to be simpler than the old system. The new scheme pays up to £168.60 a week (as of 2019/20). It’s possible you may receive more or less than this amount.

To receive £168.60, you must have a National Insurance (NI) contributions record for 35 years. If not, the amount you receive will be proportionate. If you have less than 10 years’ NI contributions, you won’t receive any State Pension. You can pay more to make up for any shortfall in your NI contribution record.

You may receive less if you opted out of the additional State Pension scheme, or ‘SERPS’. This scheme ended in April 2016. If you were in a pension scheme or personal pension plan before this date, this may apply to you.

If you were entitled to a higher pension under the previous State Pension scheme, you’ll still receive this. If you don’t claim your State Pension in the year you reach State Pension age, it will be increased when you do take it. For each year you delay, it increases by almost 5.8%.

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

Am I making the most of pension tax relief?

One major benefit of contributing to a pension is the boost your contributions will receive from tax relief. Pension providers can claim basic-rate tax relief at 20% on behalf of savers. So for every £80 you contribute, £100 will be invested into your pension. You receive tax relief on private pension contributions worth up to 100% of your annual earnings.

Tax relief is paid on your pension contributions at the highest rate of Income Tax you pay. If you’re a higher or additional-rate taxpayer, you must claim back the additional 20% or 25% on top of the basic 20% via your self-assessment tax return. If you don’t claim it, you won’t receive it.

Tax relief in England, Wales or Northern Ireland:

• Basic-rate taxpayers get 20% pension tax relief
• Higher-rate taxpayers can claim 40% pension tax relief
• Additional-rate taxpayers can claim 45% pension tax relief

In Scotland, Income Tax is banded differently, and pension tax relief is applied in a slightly alternative way:

• 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

How much more should I be saving for retirement?

Generally speaking, the more you save, the more you can expect to get back. You can choose to save as much as you can afford. If you want to, you could save up to 100% of your earnings into your pension each tax year. However, there’s an upper limit on the amount that you can save into pensions each tax year.

This is known as the ‘annual allowance’, which is currently £40,000 in the 2019/20 tax year. If you go over this amount, a 40% tax charge will apply. Obtaining professional financial advice will ensure that you are contributing the correct amounts based on your retirement goals.

Will there be limits on the value of payouts from my pensions?

The lifetime allowance is a limit on the value of payouts from your pension schemes – whether lump sums or retirement income – that can be made without triggering an extra tax charge.

But the regular contributions you and your employer make into pensions, plus the fact investments in pensions grow free of tax typically over a long time, can result in your pensions growing above the lifetime allowance.

The lifetime allowance for most people is £1,055,000 in the tax year 2019/20. It applies to the total of all the pensions you have, including the value of pensions promised through any defined benefit schemes you belong to, but excluding your State Pension. The standard lifetime allowance is indexed annually in line with the Consumer Prices Index (CPI).

Any amount over your lifetime allowance that you take as a lump sum is taxed at 55%, and any amount over your lifetime allowance that you take as a regular retirement income – for instance, by buying an annuity – attracts a lifetime allowance charge of 25%.

How can I make the most of my pension pot when I retire?

How long your pension pot lasts will depend on the choices you make. From age 55, there are three main ways you can take your money. You can take your tax-free money first, take a combination of tax-free and taxable money, or take a guaranteed income for life. You could also take a combination of these three, or simply do nothing at all.

Each of the main options usually allows you to take up to 25% of your pot tax-free. You might also need to pay tax on the remaining 75% of your pension pot, depending on your circumstances and the options you choose. Tax rules can also change in the future.

The ways to access your tax-free money, and the remainder of your pension pot, are very different on each of the options though.

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.

Preserving your wealth and transferring it effectively

Estate planning is an important part of wealth management, no matter how much wealth you have built up. It’s the process of making a plan for how your assets will be distributed upon your death or incapacitation.

As a nation, we are reluctant to talk about inheritance. Through estate planning, however, you can ensure your assets are given to the people and organisations you care about, and you can also take steps to minimise the impact of taxes and other costs on your estate.

In order to establish the value of your estate, it is first necessary to calculate the total worth of all your assets. No matter how large or how modest, your estate is comprised of everything you own, including your home, cars, other properties, savings and investments, life insurance (if not written in an appropriate trust), furniture, jewellery, works of art, and any other personal possessions.

Having an effective estate plan in place will not only help to ensure that those you care about the most will be taken care of when you’re no longer around, but it can also help minimise Inheritance Tax (IHT) liabilities and ensure that assets are transferred in an orderly manner.

Write a Will

The reason to make a Will is to control how your estate is divided – but it isn’t just about money. Your Will is also the document in which you appoint guardians to look after your children or your dependents. Almost half (44%) of over-55s have not made a Will[1], and as such, they will not have any say in what happens to their assets when they die.

Should you die without a valid Will, you will have died intestate. In these cases, your assets are distributed according to the Intestacy Rules in a set order laid down by law. This order may not reflect your wishes.

Even for those who are married or in a registered civil partnership, dying without leaving a Will may mean that your spouse or registered civil partner does not inherit the whole of your estate. Remember: life and circumstances change over time, and your Will should reflect those changes – so keep it updated.

Make a Lasting Power of Attorney

Increasingly, more people in the UK are using legal instruments that ensure their affairs are looked after when they become incapable of looking after their finances or making decisions about their health and welfare.

By arranging a Lasting Power of Attorney, you are officially naming someone to have the power to take care of your property, your financial affairs, and your health and welfare if you suffer an incapacitating illness or injury.

Plan for Inheritance Tax

IHT is calculated based on the value of the property, money and possessions of someone who has died if the total value of their assets exceeds £325,000, or £650,000 if they’re married or widowed. If you plan ahead, it is usually possible to pass on more of your wealth to your chosen beneficiaries and to pay less IHT.

Since April 2017, an additional main residence nil-rate band allowance was phased in. It is currently worth £150,000, but it will rise to £175,000 per person by April this year. However, not everyone will be able to benefit from the new allowance, as you can only use it if you are passing your home to your children, grandchildren or any other lineal descendant. If you don’t have any direct descendants, you won’t qualify for the allowance.

The headline rate of IHT is 40%, though there are various exemptions, allowances and reliefs that mean that the effective rate paid on estates is usually lower. Those leaving some of their estate to registered charities can qualify for a reduced headline rate of 36% on the part of the estate they leave to family and friends.

Gift assets while you’re alive

One thing that’s important to remember when developing an estate plan is that the process isn’t just about passing on your assets when you die. It’s also about analysing your finances now and potentially making the most of your assets while you are still alive. By gifting assets to younger generations while you’re still around, you could enjoy seeing the assets put to good use, while simultaneously reducing your IHT bill.

Make use of gift allowances

One way to pass on wealth tax-efficiently is to take advantage of gift allowances that are in place. Every person is allowed to make an IHT-free gift of up to £3,000 in any tax year, and this allowance can be carried forward one year if you don’t use up all your allowance.

This means you and your partner could gift your children or grandchildren £6,000 this year (or £12,000 if your previous year’s allowances weren’t used up) and that gift won’t incur IHT. You can continue to make this gift annually.

You are able to make small gifts of up to £250 per year to anyone you like. There is no limit to the number of recipients in one tax year, and these small gifts will also be IHT-free provided you have made no other gifts to that person during the tax year.

A Potentially Exempt Transfer (PET) enables you to make gifts of unlimited value which will become exempt from Inheritance Tax if you survive for a period of seven years.
Gifts that are made out of surplus income can also be free of IHT, as long as detailed records are maintained.

IHT-exempt assets

There are a number of specialist asset classes that are exempt to IHT. Several of these exemptions stem from government efforts over the years to protect farms and businesses from large Inheritance Tax bills that could result in assets having to be sold off when they were passed down to the next generation.

Business relief (BR) acts to protect business owners from IHT on their business assets. It extends to include the ownership of shares in any unlisted company. It also offers partial relief for those who own majority rights in listed companies, land, buildings or business machinery, or have such assets held in a trust.

Life insurance within a trust

A life insurance policy in trust is a legal arrangement that keeps a life insurance pay-out separate from the valuation of your estate after you die. By ring-fencing the proceeds from a life insurance policy by putting it in an appropriate trust, you could protect it from IHT.

The proceeds of a trust are typically overseen by a trustee(s) whom you appoint. These proceeds go to the people you’ve chosen, known as your ‘beneficiaries’. It’s the responsibility of the trustee(s) to make sure the money you’ve set aside goes to whom you want it to after you pass away.

Keep wealth within a pension

When you die, your pension funds may be inherited by your loved ones. But who inherits, and how much, is governed by complex rules. Money left in your pensions can be passed on to anyone you choose more tax-efficiently than ever, depending on the type of pension you have, by you nominating to whom you would like to leave your pension savings (your Will won’t do this for you) and your age when you die, before or after the age of 75.

Your pension is normally free of IHT, unlike many other investments. It is not part of your taxable estate. Keeping your pension wealth within your pension fund and passing it down to future generations can be very tax-efficient estate planning.

It combines IHT-free investment returns and potentially, for some beneficiaries, tax-free withdrawals. Remember that any money you take out of your pension becomes part of your estate and could be subject to IHT. This includes any of your tax-free cash allowance which you might not have spent. Also, older style pensions may be inside your estate for IHT.

Source data:
[1] Brewin Dolphin research: Opinium surveyed 5,000 UK adults online between 30 August and 5 September 2018.

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

THE VALUE OF INVESTMENTS AND THE INCOME THEY PRODUCE CAN FALL AS WELL AS RISE. YOU MAY GET BACK LESS THAN YOU INVESTED.

Plan for the future you want

Early retirement is no longer defined as the moment when you stop working forever. For many people, it’s simply the moment when you no longer have to work for money. But this also means being in a financial position to choose to keep working if you enjoy what you’re doing.

Retiring at 55 is an attainable target if you start early and develop a sound financial plan. It’s worth remembering there’s a big difference doing work you love or a job that you could leave if you get tired of it, because you have the financial freedom and flexibility that saving up enough money can give you.

Lifestyle and spending habits

So the question is, ‘How do you know how much money is enough to last through your golden years if you want to retire early?’ The answer is a highly personal one and depends on your lifestyle and spending habits.

For many people, early retirement means being able to make the shift from work they have to do to work they want to do. Taking an early retirement appeals to many people unsurprisingly, but making it a reality requires careful consideration and a well-thought-out approach to retirement planning.

Maximising your income

Working towards an early retirement strategy is built on maximising your income – how much money you’re making; expenses – how much money you’re spending; and saving – how much money you’re saving and investing.

Can you access the State Pension, the pension you receive from the state? The answer is ‘no’ if you want to retire early; the age at which you can receive your State Pension is changing for both men and women depending on when you were born.

Feeling under-prepared

Your State Pension will not be available to claim at 55, so do not include this when working out your income for the first part of your retirement. In the UK, the State Pension age will rise for both men and women until it reaches 66 in October this year and 67 between 2026 and 2028. However, 46% of UK workers, according to research[1], who are currently aged 55 and over say they feel under-prepared for their retirement.

For some people who want to wave goodbye to the 9 to 5 grind and retire early, it may seem like a pipe dream. The good news is that you can usually access private pensions from the age of 55, which makes it an age often associated with retirement. However, retiring early may affect both your private or company pension.

Assets to produce income

The rules for private and company pensions vary, depending on who provides them. We can help you to check this to see how early retirement could affect your own situation. But if you do intend to retire at 55, you will need your assets to produce income for a longer period than someone who retires later.

It means developing an accurate projection of what you think you will spend each year. Then you can compare that to the sources of retirement income you think you’ll have available to you.

Opportunity to grow

The benefit of starting a pension early on and contributing to it regularly means you’re able to take advantage of the compounding effect. Compound interest causes your wealth to snowball and allows you to earn interest on top of both your savings and existing interest, and it accumulates over time, meaning the longer you save, the more your pension has the opportunity to grow.

It makes a sum of money grow at a faster rate than simple interest, because in addition to earning returns on the money you invest, you also earn returns on those returns at the end of every compounding period, which could be daily, monthly, quarterly or annually.

Comfortable lifestyle

If you’re looking to retire at 55, you’re much more likely to have the comfortable retirement you dream of if you started saving for it early in adult life. Otherwise, you may wish to increase the contributions into your pension pot so you can meet the level of income you will need for a comfortable lifestyle.

So how much will you need when you retire? One way of estimating how much you’ll need is by referring to the widely used ’70%’ rule, which states that you’ll require 70% of your working income to maintain the same level lifestyle.

Unexpected costs

Whilst this gives you a good idea of the amount you’ll require when considering retirement, you may find that you’ll need more or less. You should consider what you plan to do in retirement and account for unexpected costs, such as long-term care, as these will need to be factored in to help you estimate your retirement costs.

Creating an overall budget and living costs as well as other expenditure you’d like to plan for, such as holidays, will further help you reach a more realistic retirement target figure. If you’re planning to retire early, your money will need to last longer, therefore it’s important to account for the extra years.

Pension tax relief

The Government automatically adds basic-rate tax relief of 20% to pension contributions. If you pay tax at the higher rate, the tax relief percentage increases to up to 45%, depending on your income. It’s important to double check that you’re claiming pension tax relief. If you have a personal pension, and you’re a higher or additional-rate taxpayer, you will need to complete a self-assessment tax return to receive the extra relief due.

It’s worth bearing in mind that the annual allowance gives you £40,000 as the maximum amount you can pay into your pension(s) each year and get tax relief on. It’s possible to use ‘carry forward’ to reduce your tax charge if you go over the annual allowance limit by carrying forward unused annual allowances from the last three years. There are conditions to using carry forward that need to be met, and pensions rules can change.

Withdrawing income

When and how you can withdraw from a pension will depend on the type of pension you have, your personal circumstances and your retirement goals. At 55, you can choose to take your pension as a lump sum (once or periodically), as an income (an annuity that provides guaranteed income) or as a mix of both.

How you choose to draw your income is up to you, with 25% available as a tax-free lump sum, and the rest taxed. Withdrawing your income is a crucial decision that you often cannot go back on once it’s made, so be sure to only make your choices after weighing up your options carefully.

Data source:
[1] 2019 Close Brothers Financial Wellbeing Index – https://www.finder.com/uk/pension-statistics

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.

Calculating the value of financial advice

Quantifying the value of financial advice has always been a challenge because people who receive financial advice have different characteristics to those who do not. But what if it was now possible to quantify the value of financial advice and isolate a pure ‘advice effect’? This is exactly what the researchers at the International Longevity Centre – UK (ILC) have been able to calculate.

What it’s worth

The new research[1], ‘What it’s worth: Revisiting the value of financial advice’ from the ILC suggests that, holding other factors constant, those who received advice around the turn of the century were on average over £47,000 better off a decade later than those who did not.

This result comes from detailed analysis of the Government’s Wealth and Assets Survey, which has tracked the wealth of thousands of people over two yearly ‘waves’ since 2004 to 2006. The wealth uplift from advice comprises an extra £31,000 of pension wealth and over £16,000 extra in non-pension financial wealth.

Impact of taking advice

One of the key findings from the research is that the proportionate impact of taking advice is greater for those of more modest means. For the ‘affluent’ group identified in the research, the uplift from taking advice is an extra 24% in financial wealth compared with 35% for the non-affluent group. On pension wealth, the uplift is 11% for the affluent group compared with 24% for the non-affluent.

An important explanation for the improved outcomes for those who take advice is that they are more likely to invest in assets which offer greater returns (though with higher risk). Across the whole sample, the impact of taking advice is to add around eight percentage points to the probability of investing in equities.

Larger pension pots

The research also found that those who were still taking advice at the end of the period had pension pots on average 50% higher than those who had only taken advice at the beginning of the period. However, this result is not controlled for other differences in characteristics, so may at least in part reflect greater engagement by those who have larger pension pots.

International Longevity Centre Director, David Sinclair, commented: ‘The simple fact is that those who take advice are likely to be richer in retirement. But it is still the case that far too many people who take out investments and pensions do not use financial advice. And only a minority of the population has seen a financial adviser.’

Source data:
[1] ‘What it’s worth: Revisiting the value of financial advice’ was published on 28 November 2019 at http://www.ilcuk.org.uk and http://www.royallondon.com/policy-papers.

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.

Putting money to work earlier allows more time for savings to grow

Millennials are more bullish than any other generation about their retirement savings, a major new study has found[1]. But with time on their side, should they be doing more?

Almost two fifths (38%) of millennial investors (aged between 18 and 37) globally are very confident they are saving enough now so they won’t run out of money in their retirement. That is more than 29% for Generation X (aged between 38 and 50) and 21% for Baby Boomers (aged between 51 and 70).

Bucking a common myth

Millennials say they are saving on average 15.9% (including employer contributions) of their income (wages plus any other earnings) specifically for their retirement. That too is more than Gen Xers (14.7%) and Baby Boomers (13.7%).

The results of the study appear to buck a common myth that millennials aren’t doing enough to save for their retirement. On the contrary, millennials appear to be saving a reasonable amount for their retirement, which is encouraging.

Miracle of compounding

The one thing that millennials have on their side over older generations is time, with up to 40 years or more until they are due to retire. Putting their money to work earlier allows more time for their savings to grow. It could also mean less of a scramble in the latter part of their careers if they have to make up shortfalls.

By starting early, millennials benefit more from the miracle of compounding – or, as Einstein called it, ‘the eighth wonder of the world’. Compounding involves earning a return not only on your original savings but also on the accumulated interest, or returns, earned on your past savings. That is why total contributions should be less the earlier you start saving, because you can earn returns on returns over a longer period.

Factors to consider

There are, of course, other factors to consider. Returns are by no means guaranteed, and careers can fluctuate too. Still, millennials are doing more than most when it comes to saving for retirement.

GIS 2019 found that millennials are saving more than the average non-retired investor aged 38 and above in most (20 out of 32) of the locations in which they live. Belgium (+9.0%), Austria (+8.5%) and Portugal (+5.3%) were the three locations where the disparity was highest between what millennials and non-millennials were saving, on average.

Source data:
[1] Schroders Global Investor Study (GIS) 2019, gathered from views of more than 25,000 investors in 32 locations around the world.

There’s a lot to look forward to

In your 50s, it’s important to make retirement planning a priority if you haven’t done so already. At this age, retirement is no longer a distant concept, and time is short if your plans aren’t on track.

This means it’s crucial to think about your retirement income goals and the steps that you need to take to achieve those goals.

Variables to consider

One of the most important things to do in your 50s is to work out how much money you’ll need to retire comfortably. You will have many variables to consider, including the age that you plan to retire, your life expectancy, your income requirements in retirement, your expected investment returns, inflation, tax rates and whether you qualify for the State Pension.

Once we’ve worked out how much money you’ll need to retire, we can then determine whether you’re on track to reach your goals. We’ll do this by working out how much money you have saved for retirement now across your various pension, investment and savings accounts, and projecting your total retirement savings into the future.

Providing more clarity

If you have multiple pension accounts, and if appropriate, it may be worth considering a pension consolidation at this stage of the process. This can provide you with more clarity in relation to your overall pension savings and make it easier to plan for retirement. You may also benefit from lower costs.

Many people realise in their 50s that their pension savings are a little on the low side. For example, the 2019 Close Brothers Financial Wellbeing Index found that 46% of UK workers aged 55 and over felt unprepared to retire, with 45% of people in this age bracket stating that funding their retirement was one of their top three money concerns. Luckily, in your 50s, there is still time to boost your retirement savings significantly.

Grow pension savings

One of the most effective ways to grow your pension savings is to save money regularly into a Self-Invested Personal Pension (SIPP) account. This is a government-approved retirement account that enables you to hold a wide range of investments and shelters capital gains and income from HM Revenue & Customs.

SIPP contributions come with tax relief. Basic-rate taxpayers receive 20% tax relief, meaning an £800 contribution gets topped up to £1,000 by the Government, while higher-rate taxpayers and additional-rate taxpayers can claim an extra 20% and 25% tax relief respectively through their tax returns.

Tax relief purposes

For 2019/20, the annual pension contribution limit for tax relief purposes is 100% of your salary or £40,000, whichever is lower. However, you may be able to take advantage of ‘carry forward’ rules and make use of unused annual allowances from the previous three tax years if you had a SIPP open during this period.

Another option to consider is saving and investing within a Stocks & Shares ISA. Like the SIPP, this type of account allows you to hold a wide range of investments, and all capital gains and income are sheltered from the taxman. Each individual can contribute £20,000 per year into a Stocks & Shares ISA.

Asset allocation

Your 50s is also a good time to review your asset allocation. You’ll want to ensure that your asset allocation matches your risk profile now that you are getting closer to retirement. As you move closer to retirement, it’s sensible to begin reducing your exposure to higher-risk assets such as equities.

With retirement just around the corner, you don’t want to be overexposed to the stock market, as there is less time to recover from a major stock market shock. Your asset allocation is an issue that you’ll want to pay close attention to as each year passes in your 50s.

Debt reduction

It’s also sensible to focus on reducing your debt in your 50s. The less debt you carry into retirement, the better – and eliminating debt early could have a big impact on your overall retirement savings.

It goes without saying that higher-interest rate debt such as credit card debt should be prioritised and paid off as soon as possible. However, many people in their 50s also have mortgage debt, so it can make sense to prioritise this as well and pay this off completely. This can free up a substantial amount of cash flow that can then be redirected into your pension.

Regular reviews

Finally, in your 50s, it’s important to review your retirement plan on a regular basis. Retirement planning is a continual process, and the more frequently you review your progress, the more prepared you’ll be for retirement and the more in control you’ll feel. At a minimum, aim to review your retirement plan at least once per year to ensure that you’re on track to achieve your goals.

As with all of life’s plans, things go awry, opportunities can present themselves or you may simply have a change of heart. If you fail to go back to your financial plan, you may find years later that it hasn’t suited your goals and priorities for some time. It’s also the perfect time to reassess your life goals.

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.

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.

THE TAX BENEFITS RELATING TO ISA INVESTMENTS MAY NOT BE MAINTAINED.
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.

What rising life expectancy could mean for you

We know that age is just a number, and for different people it means different things. It’s also a phrase used by some people who oppose age restrictions. In the UK, 65 years of age has traditionally been taken as the marker for the start of older age, most likely because it was the official retirement age for men and the age at which they could draw their State Pension.

No longer an official retirement age

In terms of working patterns, age 65 years as the start of older age is out of date. There is no longer an official retirement age, State Pension age is rising, and increasing numbers of people work past the age of 65 years.

People are also living longer, healthier lives according to the latest findings from the Office for National Statistics[1]. In 2018, a man aged 65 could expect to live for another 18.6 years, while a woman could expect to live for 21 more years. So, on average, at age 65 years, women still have a quarter of their lives left to live and men just over one fifth.

Start of older age has shifted

An important further consideration is that age 65 years is not directly comparable over time; someone aged 65 years today has different characteristics, particularly in terms of their health and life expectancy, than someone the same age a century ago.

In a number of respects, it could be argued that the start of older age has shifted, but how might this be determined? Should we just move the threshold on a few years – is age 70 really the new age 65? Or, might there be a better way of determining the start of older age?

Population projected to continue to age

At a population level, ageing is measured by an increase in the number and proportion of those aged 65 years and over and an increase in median age (the age at which half the population is younger and half older).

On both of these measures, the population has aged and is projected to continue to age. In 2018, there were 11.9 million residents in Great Britain aged 65 years and over, representing 18% of the total population. This compares with the middle of the 20th century (1950) when there were 5.3 million people of this age, accounting for 10.8% of the population.

Oldest old are the fastest-growing age group

Looking ahead to the middle of this century, there are projected to be 17.7 million people aged 65 years and over (24.8% of the population). The oldest old are the fastest-growing age group, with the numbers of those aged 85 years and over projected to double from 1.6 million in 2018 to 3.6 million by 2050 (5% of the population).
The balance of older and younger people in the population has also tipped more towards older people, reflected in a rising median age up from 34 years in 1950 to 40 years in 2018. By the middle of this century, it is projected that median age will reach 43 years.

Source data:
[1] Office for National Statistics – November 2019