Making plans for your retirement

Tailored to match your particular needs and aspirations

One of the most important stages in life which everybody has to save for is retirement. We work hard to enjoy our current lifestyle but are we doing enough to ensure that we can continue to enjoy it in our retirement? Many of us live for today, but saving into a private pension plan can help us retire sooner rather than later.

Pension plans are as individual as the people who invest in them. There is no one-size-fits-all, tax-efficient solution for private pensions. Instead they should be tailored to match your particular needs and aspirations.

Enjoy the lifestyle you want in later years

Private pensions are a tax-efficient way of saving money during your working life so that you have an income when you want to retire. With proper planning, your private pension will allow you to enjoy the lifestyle you want in later years. A private pension plan, also known as a personal pension, is a good option if you’re self-employed, as you won’t have the option to be automatically enrolled in a workplace pension.
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.

Cap on the amount you can save every year

A personal pension operates in a similar way to a workplace scheme, except that you make the contributions yourself into a plan of your choosing. You can make monthly payments, one-off payments or a combination of the two. But the government places a cap on the amount you can save every year, upon which you can earn tax relief. This cap is known as the annual allowance, which is currently £40,000 in the 2019/20 tax year.
In addition, the lifetime allowance is a limit on the value of payouts from your pension schemes – whether lump sums or retirement income. The lifetime allowance currently for most people is £1,055,000 and 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).

Radical reform gives people greater pension flexibility

To take advantage of your available allowances, typically you should contribute as much as you can into your pension, as early as you can and for as long as you can. This will allow you to take advantage of any compounding effects and long-term rises in the market. You should also consider increasing your payments in line with your earnings to help make maximum use of your annual and lifetime allowances.
In March 2014 the then Chancellor of the Exchequer announced a radical reform of the pensions system to give people greater flexibility to access their pension savings. The new pensions freedoms took full effect from 6 April 2015. To access your pension pot you must have reached the normal minimum pension age – currently 55 (or earlier if you’re in ill health or if you have a protected retirement age). Up to 25% of your accumulated fund can be withdrawn as a tax-free cash lump sum with the balance used to provide an income.

There are different types of pension scheme:

Defined Contribution (DC) – also known as a money purchase scheme

This is the most common type of pension today and works like a tax-efficient, long-term savings scheme. The idea is to build up your savings over your working life. When you come to retire, as early as 55 years old, you can take up to 25% of the total pot out as a tax-free lump sum. The remaining amount can be left to build up further until you decide what to do depending on your scheme.

Stakeholder Pension

This is a simplified form of the defined contribution scheme, which allows you to pay low minimum contributions and is very flexible. Charges are capped and providers offer default investment strategies.

Self-invested Personal Pension (SIPP)

A SIPP is a specialist type of personal pension that allows you to invest in a wider range of assets than a standard personal pension, which is limited to a restricted list of funds. A SIPP can hold individual shares, commercial property and exchange traded funds, for example. As the name suggests, it is self-invested, meaning that you can have the flexibility for managing your own investment portfolio. This approach in particular requires professional financial advice, unless you are an experienced investor

Defined Benefit (DC) Scheme

Defined Benefit pensions (also known as Final Salary schemes) are a type of workplace pension that guarantees a generous, index-linked fixed pension income for life. Nearly all of these schemes are now closed to new members. The amount of pension received is calculated as a percentage of the members salary typically in the last year of employment, usually the highest earning year though some schemes use other calculations such as the average career earnings.

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.

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 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.

Inheritance Tax

No longer something that only affects the very wealthy

Inheritance Tax is no longer something that only affects the very wealthy, but the good news is that there are ways to limit the amount of Inheritance Tax your family may potentially face.

When someone dies Inheritance Tax a tax charged on their estate above a certain value. A person’s estate is basically everything they own, including their main property, any other properties, cars, boats, life assurance policies not written in an appropriate trust and other investments, as well as personal effects such as jewellery.

Inheritance Tax is potentially charged at a rate of 40% on the value of everything you own above the Nil-Rate Band threshold. This is the value of your estate that is not chargeable to Inheritance Tax. The amount is set by the government and is currently £325,000 which is frozen until 2021. When you die your estate is not liable to tax on any assets up to this amount. However, anything over this amount may be taxed at a rate of 40%.

Since 6 April 2017, if you leave your home to direct lineal descendants which includes amongst others your children (adopted, fostered and stepchildren) and grandchildren, the value of your estate before tax is paid, will increase with the addition of the Residence Nil-Rate Band, currently £150,000 in 2019/20.

Inheritance Tax is an unpopular and controversial tax, coming as it does at a time of loss and mourning, and can impact on families with even quite modest assets. However, there are legitimate ways to mitigate against this tax. However, some of the most valuable exemptions must be used seven years before your death to be fully effective, so it makes sense to obtain professional financial advice and consider ways to tackle this issue sooner rather than later.

Making plans to mitigate against Inheritance Tax:

Make a will

Dying intestate (without a will) means that you may not be making the most of the Inheritance Tax exemption which exists if you wish your estate to pass to your spouse or registered civil partner. For example, if you don’t make a will then relatives other than your spouse or registered civil partner may be entitled to a share of your estate and this might trigger an Inheritance Tax liability.

The facts:

Inheritance Tax is levied at a fixed rate of 40% on all assets worth more than £325,000 per person (0% under this amount) – or £650,000 per couple if other exemptions cannot be applied.

The Residence Nil-Rate Band is currently £150,000. This is an allowance that can be added to the basic tax-free £325,000 to allow people to leave property to direct descendants such as children and grandchildren – the allowance will be reduced by £1 for every £2 that the value of the estate exceeds £2m.

Make lifetime gifts

Gifts made more than seven years before the donor dies, to an individual or to a bare trust, are free of Inheritance Tax. So if appropriate you could pass on some of your wealth while you are still alive. This will reduce the value of your estate when it is assessed for Inheritance Tax purposes, and there is no limit on the sums you can pass on.

You can gift as much as you wish, and this is known as a Potentially Exempt Transfer (PET). However, you will need to live for seven years after making such a gift for it to be exempt from Inheritance Tax, but should you be unfortunate enough to die within seven years then it will still be counted as part of your estate if it is above the annual gift allowance.

You need to be particularly careful if you are giving away your home to your children with conditions attached to it, or if you give it away but continue to benefit from it. This is known as a Gift with Reservation of Benefit.

Leave a proportion to charity

Being generous to your favourite charity can reduce your Inheritance Tax bill. If you leave at least 10% of your estate to a charity or number of charities, then your Inheritance Tax liability on the taxable portion of the estate is reduced to 36% rather than 40%.

Set up a trust

Family trusts can be useful as a way of reducing Inheritance Tax, making provision for your children and spouse, and potentially protecting family businesses. Trusts enable the donor to control who benefits (the beneficiaries) and under what circumstances, sometimes long after the donor’s death.

Compare this with making a direct gift (for example to a child) which offers no control to the donor once given. When you set up a trust, it is a legal arrangement and you will need to appoint ‘trustees’ who are responsible for holding and managing the assets. Trustees have a responsibility to manage the trust on behalf of and in the best interest of the beneficiaries, in accordance with the trust terms. The terms will be set out in a legal document called ‘the trust deed’.

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.

Freetirees – Pension freedoms usher in a new generation

The introduction of pension freedoms has been a huge enabler for over 55s, allowing millions to draw income from their pensions flexibly. Pension freedoms offer the opportunity to transition into retirement by continuing to work with reduced hours beyond traditional retirement age.

This emerging trend enables you to choose a middle path, allowing for reduced working hours, more flexible quality leisure time, whilst also receiving your retirement benefits. Taking a phased approach to retirement, new research[1] shows, was the preference for half of UK workers over 50, or 5 million workers[2].

Tailor retirement to your own individual requirements

The flexibility that pension freedoms gives, means that older workers can tailor their retirement to their own individual requirements, giving rise to a new distinct and more ‘free’ stage of life in between work and retirement.

A quarter (26%) of over 50s could see themselves continuing to work while collecting their pension, but their motivation for doing so isn’t driven solely by economics. Keeping their brain active and an enjoyment of work as well as benefits of social interaction all play their part.

Work life balance has never been more important

Earning an income later in life also provides workers with the opportunity to continue saving, which can mean higher retirement benefits in the future. The research highlights that a work life balance has never been more important to those over 55. Pension freedoms have allowed them to throw off the shackles of a traditional retirement and follow a plan that suits their individual needs. While historically people benefitted from generous final salary pensions, one drawback of these was they didn’t offer much flexibility to decide how and when to take benefits.
The pension freedoms have changed the way people think about retirement and are enabling the rise of a more flexible transition into retirement including allowing people to choose to start accessing some retirement savings to support a reduced working pattern.

Freedoms to continue to live life on your own terms

Pension freedoms have allowed older workers to be more flexible, creating a distinct phase in their later life where they can alter their working pattern to their needs. This allows them to continue working beyond traditional retirement age while also having more time for leisure, for family, for volunteering and to pursue hobbies and travel.

The research also highlights another point that older workers want to be able to continue to live life on their own terms and pension freedoms allows an increasing number to enjoy a new life stage where they can combine reduced working hours with enjoying more leisure time.

Source data:
[1] Research conducted by Aegon in conjunction with Opinium, based on responses from 1007 UK workers aged 50+ earning £20k+ between 30 November and 6 December 2018.
[2] Of the 10.3m people over 50 in employment in the UK, 49% want to transition – 5million https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/datasets/ employmentunemploymentandeconomic inactivitybyagegroupnotseasonallyadjusteda05nsa

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.

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.

Retirement options

Greater responsibility on individuals to plan for financial security in old age

Deciding what to do with your pension pot is one of the most important decisions you will ever make for your future. The ‘pension freedom’ changes of April 2015 represented a complete shake-up of the UK’s pensions system, giving people much more control over their pension savings than before.

New research[1] has revealed that the number of savers who have embraced their freedoms now exceeds one million (1.04 million). The report from HM Revenue & Customs shows that a record-breaking sum of £7.83 billion was withdrawn in 2018[2], up from £6.54 billion in 2017. It is reported that there have been 5.49 million individual withdrawals since the pension freedoms were introduced in 2015.

Uncontrolled ‘dash-for-cash’

There is, however, currently no evidence of an uncontrolled ‘dash-for-cash’ that was feared by some when the freedoms were introduced. The 2018 figure of £7.83 billion needs to be seen in the context of a total private pension wealth in the UK of approximately £5,000 billion[3].

Withdrawal payments have also consistently averaged less than £4,000 since summer 2017, showing little evidence of savers rushing to buy extravagant luxury items. These freedoms are attractive to younger savers too, with recent figures released[4] finding that one third (33%) of under-35s believe this flexible access encourages them to put more money towards their pension.

Five tips to help make the most of the pension freedoms

1. Understand your State Pension

The State Pension continues to be most people’s biggest source of income in retirement. But the State Pension, and the age at which you are entitled to this money, is changing – www.gov.uk/check-state-pension.

2. Take your time

You may have spent 40 years saving for your retirement. Take more than 40 minutes considering your options.

3. Obtain professional financial advice about what you can do with your pension pot

There are a number of different ways you can take your defined contribution pension pot. You can usually take 25% of your pot tax-free from age 55.

Your options are:

Leave your whole pot untouched

You don’t have to start taking money from your pension pot when you reach your ‘selected retirement age’. If you want to build up your pension pot further, you can continue to receive tax relief on your own pension savings of up to £40,000 each year (tax year 2018/19) less employer contributions being made, or currently 100% of your earnings if you earn less than £40,000, until age 75 (beyond 75 for employer/company contributions).

Guaranteed income (annuity)

You can use your pot to buy an insurance policy that guarantees you an income for the rest of your life – no matter how long you live. You don’t have to accept the annuity that your pension provider or pension scheme offers you. The ‘open market option’ allows someone approaching retirement to shop around for a number of options to convert their pension pot into an annuity, rather than simply taking the default rate offered by their pension provider.

Adjustable income

This option is also known as ‘flexi-access drawdown’. You move your pension pot into one or more funds that allow you to take a taxable income at times to suit you. You choose funds that match your income objectives and attitude to risk and set the income you want. The income you receive might be adjusted periodically, depending on the performance of your investments. The full 25% tax free lump sum can be taken at outset or you can move funds gradually into flexi-access drawdown and take your tax free cash in stages.

Take cash in lump sums

Another option is to take smaller sums of money from your pot until you run out. How much you take and when you take it is up to you. You decide how much to take and when to take it. You don’t have to take your 25% tax-free amount in one lump sum – you can decide to receive it over time. Each time you take a lump sum of money, 25% can be tax-free, and the rest is taxable.

Take your entire pot in one go

You can cash in your entire pot – 25% is tax-free, and the rest is then taxed at your highest tax rate/s (by adding it to the rest of your income). However, cashing in your pension pot will not give you a secure retirement income. If you’re thinking of doing this, you should first obtain professional financial advice to discuss your options.

Mix your options

You can mix different options. Usually, you would need a larger pension pot to do this.

4. Consider your life expectancy

Pension savings are intended to last the rest of your life, yet we typically underestimate how many years we may live. Figures from the Office for National Statistics[5] show that for 2015 to 2017, a woman’s life expectancy in England from birth remains 82.9 years, and for a man it is 79.2. For men and women in Scotland and Wales, the latest figures show a slight decline by more than a month. Men in Northern Ireland have seen a similar fall.

5. Approach final salary pension transfers with caution

If you have a final salary pension, you will need to transfer it elsewhere to access the freedoms. This is a significant decision, as you could lose important benefits. Such a decision should be approached with caution and with the guidance of professional financial advice.

The onus is now firmly on us as individuals to plan our financial security in retirement. We’re now expected to take greater responsibility for funding the time in our lives when we’re dependent on a lifestyle that we’ve spent the last 40 years saving for.

Source data
[1] https://www.gov.uk/government/statistics/flexible-payments-from-pensions
[2] Note: this figure underplays the total amount withdrawn as it does not include any additional amounts taken as tax-free-cash.
[3] https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/wealthingreatbritainwave5/2014to2016#private-pensions-wealth
[4] Aviva 2018 survey of 1,000 UK adults: ‘Would you put more money towards your pension if you were able to access the money more flexibly?’
[5] https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/lifeexpectancies/bulletins/nationallifetablesunitedkingdom/2015to2017

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.

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.

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.

What’s important to you?

Reaching those milestones starts with setting clear financial goals

We all have dreams for the future, and many of those dreams require money and planning to make them become a reality. Reaching those milestones starts with setting clear financial goals. Making decisions with a clear endpoint in mind can make it easier to achieve financial security and allow you to enjoy your life to the full, so we’ve put together this brief rundown to help you get closer to your goals today.

Be prepared for any financial emergency

Typically, emergencies don’t let you know they’re on their way, and in some cases, you can’t afford for them to happen – so it’s always good to be prepared for any financial emergency with savings. The amount of rainy-day savings you need will of course depend on your situation, but financial experts recommend aiming to have around three to six months’ worth of your regular expenses put away.

Savings can act as a safety net until you get back on your feet or until the situation changes. By having an emergency fund, it helps you deal with those surprises without needing to get into debt. Depending on your budget, saving might not be easy, but if you can spend less than you earn, it’s recommended to put some money aside for a rainy day.

Focus on your time horizon

It’s important to know the ‘when’ of your financial goals, because investing for short-term goals differs from investing for long-term goals. Your investment strategy will vary depending on how long you can keep your money invested. As your priorities or life circumstances change, you may also find that you want to delay certain goals by a year or two, while others you may want to try to meet sooner. And some – such as an expensive family holiday – you may decide to forego altogether.

It’s important to stay flexible and adapt your timetable to your changing needs and priorities. While past performance is no guarantee of future results, historical returns consistently show that a well-diversified investment portfolio can be the most rewarding over the long term.

Be patient

Building wealth for most of us takes time, so you have to be patient. And achieving your financial goals can have its ups and downs. But sometimes, challenges aren’t about failing to reach your goals – they’re about setting better goals in the first place. Set yourself up for success from the start by creating realistic, achievable financial goals that are connected to what’s important to you.

If you know what your financial goals are, you can start working to accomplish them. And working out what those goals are is the very first step. Setting financial goals is essential to financial success. Once you’ve set these goals, you can then write and follow a roadmap to realise them. It helps you stay focused and confident that you’re on the right path.

Little and often

Having set clear goals, getting started by saving little and often and seeing your own progress towards your goals can reinforce your motivation. Regular saving from a young age can make life easier when you need to access money quickly for a large purchase further down the line. Gradually watching those small amounts build up into more significant savings will further encourage you to save more.

One of the major benefits of long-term saving is the ability to make substantial gains through compound interest. ‘Simple’ interest is calculated on the original amount of a deposit. But compound interest is calculated on this amount and also on the accumulated interest of previous periods. Put simply, compound interest is ‘interest on interest’.

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 DEPEND ON YOUR INDIVIDUAL CIRCUMSTANCES.

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.

Building a diverse portfolio

Time, patience and making informed decisions – making sense of today’s market headwinds and building a diverse portfolio should be key priorities for all investors. Whether you have a lump sum to invest or want to invest regularly each month, it’s important to know your money is working hard for you.

Growing your wealth is not something that happens automatically. It takes time, patience and making informed decisions. Whatever your long-term wealth priorities are, planning and successful investing of your wealth can help you get there.

Diversify and spread risk

Holding a number of structured products in a portfolio not only serves to spread risk, but can also improve the shape of the potential outcomes. Portfolios should typically include the main asset classes needed to properly diversify and spread risk, as well as grow money in line with the investors attitude and risk tolerance.

The four classes of assets are generally considered to be, stocks and shares or equities, fixed income or bonds, money market or cash equivalents and property or other tangible assets. Depending on your attitude to risk, your portfolio may include some or all of these asset types, as they have different levels of risk and move in different ways relative to one another. There are no good or bad asset allocations, you need to find the one that’s right for you based on your own situation and investment goals.

Different geographical areas

Investors also need to consider holding funds invested in different geographical areas, to further spread risk and protect them from stock market corrections. But this exposes investors to foreign currency risk. This means that when sterling is weak, every pound invested will buy fewer foreign currency denominated investments. However, if investors already have overseas investments, lower exchange rates can be beneficial, as this will boost values.

One of the basic building blocks of a solid portfolio is investment diversification. Put simply this means investors shouldn’t put all of their eggs in one basket. This is the basic principle behind asset allocation which involves spreading money across different asset classes and diversifying how to allocate money within each sector.

Best-performing investments

A basic, diversified portfolio might include several investment categories such as stocks, bond and cash. The allocation to each of these broad categories should be based upon the investors investment goals, their tolerance for investment risk, and time horizon for needing the use or access their investments.

Investment fees are one of the most important differentiators that lead to the eventual outcomes of an investors portfolio valuation. They can eat away at even the best-performing investments and have a real impact on investment returns.

Impact on future returns

Even small differences in fees over the long-term, can have a big impact on future returns. Even when investment returns are the same, charges corrode and eat away at an investment portfolio. Investors can’t control the way markets behave, but with professional financial advice they can definitely control one thing, costs.

Even Warren Buffett, one of the most famous investors in the world, doesn’t do is to try to time the stock market. There will always be reasons why not to invest and one of the main arguments against market timing is that mistakes can be costly. Even not investing because investors fear a market correction is an attempt to time the market that rarely pays off and may lead to investors missing out on gains while they wait patiently for just that right time to make an investment.

Cultivate the art of patience

For investors to give their investments the best chance of earning a return they need to cultivate the art of patience. It’s not a prerequisite that they need perfect timing to achieve their desired investment returns, they simply need time.

Time in the market beats timing the market – almost always. But some investors do just the opposite. It’s worth remembering that trying to move money in the market before it rallies and out before it declines, requires a crystal ball that just hasn’t been invented.

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.

Why do you want to invest?

Reaching specific life goals requires planning

If you don’t know where you want to go, you’ll find it tricky getting there! Investment goals cover everything from the old adage of saving for a rainy day to planning for a comfortable retirement.

Goal-based investing, which emphasises investing with the objective of reaching specific life goals – such as buying a house, saving for your child’s education, or building a nest egg for retirement – instead of comparing returns to a benchmark.

Whatever your personal investment goals may be, it is important to consider the time horizon at the outset, as this will impact the type of investments you should consider to help achieve your goals. It also makes sense to revisit your goals at regular intervals to account for any changes to your personal circumstances, for example the arrival of a new member to the family or salary increases.

Investment strategies should often include a combination of various fund types in order to obtain a balanced approach to investment risk. And maintaining a balanced approach is usually key to the chances of achieving your investment goals, while bearing in mind that at some point you will want access to your money.

Short Term – Lifestyle planning

Knowing you’re prepared for life’s surprises can take a burden off your mind – and your bank balance. An emergency fund is a pot of money set aside to help you cover the financial surprises that life throws at you. Surprises such as losing your job, needing to make unexpected home repairs, replacing your car or unplanned emergency travel. These events can be stressful and costly, but preparing in advance can be a big help.

Medium Term – School and university fees planning

School and university fees planning may involve the same idea of buying a mix of equities, bonds and other investments in order to build enough capital to pay for future fees. Most are geared to begin paying out after a fixed-term horizon, usually 10 years, with withdrawals allowed incrementally after that to meet the fees. In this way they need to be more flexible than pension plans that pay out on retirement.

For this reason, many parents and grand parents often start planning when a baby is born, which provides a better way to pay fees in monthly payments, making the cost of an independent education or university education more manageable.

Long Term – Retirement planning

The importance of shifting goals can be seen in pension plans, where it is quite common for funds to be more geared towards equities in it’s early stages to try to build capital growth. As the individual grows closer to retirement age, the pension plan will tend to lean more towards bonds to reduce volatility. Exposure to other riskier sectors may also be gradually reduced as the individual ages.

Factors to help you develop your investment goals:

Your goal

What are you investing for and how much are you hoping to get back?

Your attitude to risk

How comfortable are you with taking risk with your money, as you may get back less than you invested?

Your time horizon

How long are you prepared to put your money away for?

Income, growth or both

Do you want to look at funds that aim to make regular payments through dividends or interest (like an income), or at those that aim to increase in value over time?

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.

Cashing out

Pension changes brought a whole new range of options to consider

Unadvised retirees who are now able to dip into their pension are having to return to work to cope with juggling their finances, according to a new report[1]. Pension freedoms have given individuals control over how to spend their retirement savings, but a number of unintended consequences have emerged. Since rules governing how pensions can be taken were dramatically relaxed in 2015, more than a million over-55s have gone on a freedom-fuelled spending spree.

The pension changes brought a whole new range of options to consider. Individuals now have to think about whether they want an annuity, drawdown, cash or a combination of options; when to access their pension; if it is better to use savings first before drawing their pension; and so on.

However, it seems many don’t really understand the consequences of these options. As a result, more than £23 billion has been ‘cashed out’ from the nation’s pension pots via more than five million individual payments. The findings show the increase in retirees returning to the workforce since the introduction of pension freedoms four years ago is due to the number of options available and the lack of professional financial advice.

Facing financial pressure

A quarter of retirees who have returned to work since April 2015 say they were faced with financial pressure. Figures from HM Revenue & Customs show around one million over-55s withdrew a 25% tax-free lump sum from their pension in the last year, up 23% points from the 12 months prior.

There is a lot to think about when you’re planning for retirement, and your circumstances will change over time, which is why it is important to obtain professional financial advice. There’s no doubt the pension freedoms have been hugely popular, but for some retirees they have come at a high price. People now face more complicated decisions in retirement, and it’s clear not everyone is getting it right.

Scale of the problem

The figures also show other reasons for returning to work that include reigniting a sense of purpose and boosting social relationships. A report from the Pensions Policy Institute shows women particularly are continuing to struggle with pension savings. The average pension for a woman is currently £100,000 lower than for men.

Women’s pension savings have historically been impacted by a combination of the gender pay gap, part-time working and the increased burden of childcare costs, but this figure lays bare the scale of the problem.

Source data:
[1] All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 2,028 adults, who have accessed their DC pension since 1 April 2015. Fieldwork was undertaken between 18 and 29 April 2019. The survey was carried out online for Zurich.

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.

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.

ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

Retirement longevity

Your destiny is now in your own hands

If you are in your 50s or 60s, your thoughts are probably turning towards retirement. When should you retire? How much money do you need?

In trying to answer these questions, you face a problem. Because of longevity trends, we are on average living longer. With longevity increasing, your wealth may have to provide you and your spouse or partner with an adequate income for 30 or even 40 years.

Britons aged 30 today have a 50% chance of living to more than 100, while 50-year-olds have an even chance of reaching 95[1]. Longer lifespans, however, raise financial challenges – for individuals as well as for families and society.

The idea of a retirement lasting many decades may seem appealing, but longer retirements mean more years of living off your pension and savings. Will yours be enough?

Extra benefit of compound interest

How much money you need to save depends on when you actually start saving and how much you want to save in total. The earlier you and potentially your employer (if they match your contributions) start adding to your pension pot, the less you will need to save each month because the cost is spread over a longer period.

Moreover, if you start saving earlier, your funds will accrue the extra benefit of compound interest throughout the duration of your savings. Making money from the interest means you can actively save less but still end up with the same amount.

Much more freedom and flexibility

The good news is that changes to pensions also now mean you have much more freedom and flexibility over how to take your benefits – whether as tax-free cash, buying an income for life, leaving your pension fund invested while drawing an income, or a combination of all these options.

Unless you believe the Government is likely to become more generous with the State Pension and other retirement benefits, individuals will almost certainly need to save more to enjoy the standard of living they would like in retirement.

Building a retirement nest egg

Over the last few decades, employer pensions have become generally less generous. Today, people starting a new job in the private sector are very rarely offered a traditional defined benefit pension – where the employer guarantees you a certain level of pension based on your salary and length of service.

Most employer-based pensions now depend on how much you and your employer have contributed and the investment returns achieved by that money. That said, for most people, saving via a workplace pension still remains the correct approach to take for building a retirement nest egg – not least because the employer contributions are effectively free money.

A number of attractive tax breaks

Importantly, pension savers benefit from a number of attractive tax breaks, including Income Tax relief on contributions and up to 25% of the proceeds being tax-free. For 2019/20, the annual limit on tax-relievable personal contributions is 100% of your salary (or £3,600 if more). In addition, there is a limit on tax-efficient pension funding called the ‘annual allowance’ (£40,000 for most people) – this applies to both contributions paid by you and contributions paid by your employer and, if exceeded, means you will pay tax on the excess (an annual allowance charge).

We’ll help keep track of your pension contributions so that you know if you’re getting close to your annual limits.

Maximum tax-free retirement savings

In some cases, we may be able to ask your pension provider to pay the charge from your pension benefits. You may not be subject to an annual allowance charge (or a lower charge may apply) if you have unused annual allowances from the previous three tax years that can be carried forward.

Increasingly, more people are also being caught by the ‘lifetime allowance’, which puts a limit on the total value of their pension funds that can be accumulated without suffering a tax charge. From 6 April this year, the pensions lifetime allowance increased to £1,055,000. The pension lifetime allowance is the maximum amount that you can accumulate in your pension plans without suffering a tax charge (lifetime allowance charge).

Source data:
[1] The 100 Year Life: Living and Working in an Age of Longevity, by Andrew Scott and Lynda Gratton, September 2018

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.

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.

Planning for every eventuality

Responding to situations rather than reacting to them

As the saying goes, ‘People don’t plan to fail, but they do fail to plan.’ To enable you to achieve want you want to, whether that’s trying to lose weight, getting fitter or securing that promotion, having a plan and being prepared for every eventuality is a great way to help move you closer towards your goals.

You can do almost anything when you feel confident about your finances. So how confident are you? No matter what your current age or financial situation, if you haven’t already started or you need to make improvements to your existing finances, the best time to start is right now. The financial plans you put in place today will lay the foundations for your and your family’s financial security and independence tomorrow.

Trying to get your attention

The truth is, though, some of us are better planners than others and some of us live for the now and spend in the moment. But somewhere out there, beyond the shiny feel-good of today, our future selves are waving their arms around trying to get our attention.

Being a good planner means you need to be more goal oriented and able to take control of your life. By planning ahead, you can then identify the associated risks, weigh and categorise them, prioritise and create a financial plan. In this way you can transform risks into opportunities and experience the rewards of taking them.

Increasing your net worth

Most people believe the key to wealth is a high-paying job. Yes, of course it’s easier to amass assets if you have more money coming in every month, but one key to increasing your net worth is to spend less than you make and then make it work really hard for you, and not someone else.

Thinking long term is an important characteristic of accumulating wealth and achieving financial independence. Being financially independent means that the income you generate from investments alone is enough to cover all your expenditure.

Having a sound financial plan

But without proper financial planning we are not ready to respond to challenges that life may throw our way. Hence we become reactive. Having a sound financial plan in place ahead helps us to become proactive.

By becoming proactive, we are then able to take the right action in the face of certain challenges and adversities. When you are proactive, you respond to situations rather than reacting to them.