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Month: March 2022

Looking to build a bigger pension?

Don’t miss the deadline to give your pension savings a boost.

As another extraordinary financial year comes to a close, it’s more important than ever to make good use of your annual pension allowances. Giving your pension savings a boost and assessing where you stand will give you peace of mind that you are on track to enjoying the retirement you are planning for.

The 2021/22 tax year ends on 5 April. Staying on top of your retirement plans is important all year round but with the tax year ending on 5 April, just a few weeks away, it’s a good time to consider if you’ve made the most of this year’s pension tax benefits. If you haven’t, there’s still time for any payments or changes to be processed.

Tax relief

Pension tax relief is an extra amount that’s added to your pension contributions. So it effectively means it’ll cost you less to save more into your pension plan. Although most people receive tax relief on their pension contributions, depending on how your pension scheme works (if you’re part of a salary sacrifice or salary exchange scheme, for example) you might receive tax benefits in a different way. So you should either speak to us or check with your employer if you’re not sure.

The amount of tax relief you receive on your own contributions usually depends on the rate of income tax you pay. For most of the UK, this means basic rate taxpayers (who pay 20% income tax) receive tax relief at the same rate. If you’re a higher rate taxpayer you receive 40% tax relief on contributions that are matched by income taxed at that rate, and the same for additional rate taxpayers at 45%, but you’ll need to claim back anything over 20% from the government unless you pay using salary sacrifice or are a member of an occupational scheme operating the ‘net pay’ method of tax relief.

Annual allowance

If you don’t earn any taxable income, you’re still entitled to receive 20% tax relief on your contributions up to the amount you earn. If you have no earnings, or earn less than £3,600 in the current tax year, you can still receive tax relief on contributions up to £3,600 (i.e. if you pay £2,880 net of basic rate tax relief, an amount of £3,600 is added to your pension). While income tax is slightly different in Scotland, the effect on your pension contributions is broadly the same.

In addition to the tax relief limit described above, there is an annual allowance which is £40,000 for most people. If all contributions combined, including those from an employer, exceed the annual allowance in a tax year, a tax charge will be applied to the excess.

Pension contributions

The annual allowance applies to the total amount of contributions made into all of your pension plans in a tax year – including the ones your employer, or any third-party, makes on your behalf. The good news is that if you haven’t used all of your pension annual allowances in the last three tax years, you may be able to carry them over and use them to pay in more in the current tax year.

When planning to make large pension contributions, spreading them across tax years can make tax sense, for example that will mean higher rate relief is available on the full contributions. Remember that you still can’t contribute more than 100% of your earnings in any tax year if tax relief is to be available on the contributions.

Retirement goals

Most people can contribute up to £40,000 to pensions each year and benefit from tax relief. But if your income rises above a certain level – which is £200,000 for the 2021/22 tax year – this allowance could be reduced or ‘tapered’. The tapered annual allowance effectively reduces the amount of money that can be contributed to a pension by you and / or your employer before having to pay tax.

The taper doesn’t usually apply if your ‘threshold income’ is less than £200,000. If it is above this level, you will need to check whether your ‘adjusted income’ is greater than £240,000 (2021/22 tax year). The annual allowance reduces by £1 for every £2 that your adjusted income exceeds £240,000, to a minimum tapered allowance of £4,000. Without careful financial planning, you could find yourself subject to an unwelcome tax charge.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS PLAN HAS A PROTECTED PENSION AGE). THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE 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. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.

The importance of financial protection

Millions battling with financial hardship, relationship stress and sleepless nights.

Fear, worry, and stress are normal responses to perceived or real threats, and at times when we are faced with uncertainty or the unknown. So it is normal and understandable that people are experiencing fear in the context of the COVID-19 pandemic.

The pandemic and the resulting economic impact has negatively affected many people’s mental health. Nearly half of UK adults (47%) have experienced mental health challenges during the pandemic, with millions battling with financial hardship, relationship stress and sleepless nights.

Life insurance or critical illness cover

New research reveals that only a small proportion of people notify their insurer of a mental health condition in the mistaken belief that it will affect their ability to take out life insurance or critical illness cover. This means they might not have adequate cover or access to support provided by their insurer.

Three in ten (30%) people report that they currently have a mental health condition or have experienced this previously. However, only four in ten 44% have informed their insurer. There remains confusion around what can, or should, be said to an insurer when it comes to physical and mental health.

Ineligible for protection cover

Of those who did not disclose a mental health condition, nearly two-fifths (37%) thought their provider would only be interested in physical illness. Over a quarter (26%) felt it was personal and so would rather not share their condition with their provider. Almost one in five (18%) worried they would not qualify for a policy or would be charged more.

Contrary to these misconceptions, declaring a mental health condition does not necessarily mean higher premiums and it is unlikely to mean someone is ineligible for protection cover. Being open with an insurer means those with mental health conditions are more likely to receive the right support.

Getting the right support

Some people are confused about how mental health conditions affect their critical illness cover or life insurance, which prevents them from getting the right support. Insurers aren’t trying to catch people out – they are there to help.

The challenges of the last 20 months have highlighted the value of protection policies for families and individuals in difficult times.

Source data:

[1] Research carried out online by Opinium Research across a total of 2,002 UK adults (Booster sample of 502 self-employed workers and 1,015 Renters. Fieldwork was carried out between 21st – 27th October).

Mind the pension gender gap

Women are being urged to think about their long term savings.

Imagine reaching retirement age and discovering that, despite years of saving, you don’t have enough money to get by. Worse still, suppose you’re unable to pay for the right kind of care in your old age.

If you and your partner separate or your spouse dies unexpectedly – will you have sufficient funds to see you through retirement? Now, all of these might sound like worst case scenarios but, unfortunately, for women right across the UK one or more of them could become a reality.

Earning trends

Women are still behind men when it comes to retirement savings. The Women and Retirement report[1] has found that if current work and earning trends continue, young women today will need to save an average of £185,000 more during their working life to enjoy the same retirement income as men.

The colossal gender pension gap is made up of a savings shortfall, plus the need to fund a longer retirement because women on average live longer than men. This also leads to higher care costs. Many women will naturally take time off to start a family – resulting in gaps in their work history. And even if women remain in the workforce, some still tend to earn less than men, on average.

Vulnerable situation

21% of women surveyed said they plan to rely at least partly on their partner’s income in retirement. However, this can leave women in a particularly vulnerable situation should they separate from their partner.

Right now, it’s rare for divorce settlements to account for pension assets, which means that women could end up in particularly unstable financial situations following divorce.

Funding retirement

Also, women tend to live longer than men – two to three years, on average. Indeed, this continued rise in longevity means that a 25-year-old man today can expect to live to 86, while a woman can live to 89.

And while rising longevity is of course a good thing, it does raise specific challenges – especially when it comes to funding retirement and old age.

Living longer

Together with living longer women are also more likely to need care when they’re older. In fact, of the 6 million people in the UK over the age of 60 currently living with a disability, 3.5 million of them are women.

And those women who do need care spend on average a year longer in care homes than men. Right now, the average cost of care is £679 per week, which means women would need an extra £35,000 during retirement for residential care costs.

Moreover, as women can expect to live two to three years longer than men, they would also need around £50,000 for their retirement – bringing the total amount needed to match a man’s retirement income to £185,000.

Source data:

[1] Scottish Widows 2021 Women and Retirement Report – research carried out online by YouGov Plc across a total of 5,059 adults aged 18+. Data weighted to be representative of the GB population. Fieldwork was carried out between 23rd March and 3rd April 2021 through an online survey. 5,059 interviews were carried out. The sampling criteria were based on four key metrics: age, gender, region and social grade.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS PLAN HAS A PROTECTED PENSION AGE). THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE 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. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.

It may be time to invest your cash

Is your wealth protected from the damaging effects of inflation?

Many people underestimate the damaging effect of low interest and high inflation on their cash savings. A continued period of low interest rates on cash savings and rising inflation could pose a real risk to savers in 2022 even if the Bank of England (BoE) moves to increase interest rates further in the coming months.

Savers with large amounts of money sitting in cash should not to be lulled into a false sense of security if interest rates creep up, because of the threat of higher inflation throughout 2022. The damaging effects of high and rising inflation will likely more than wipe out any uplift a higher interest rate will give to the value of cash savings. Currently 8.6 million consumers hold over £10k of investable assets in cash[1].

Interest ‘base rate’ increase

Inflation is expected to average over 4% this year, peaking at close to 5% in the spring[2]. The BoE may look to dampen the effects of soaring prices by further increasing the interest ‘base rate.’ While this may offer some relief if passed on to savers, the average easy access savings account is currently sitting at just 0.19%[3] and any upward change is expected to be small.

As the economy continued to recover last year from the COVID-19 pandemic we experience a sharp rise in the cost of living. During a period of high inflation people will notice a dramatic decrease in their purchasing power over time, particularly if their wages don’t keep pace or if they have savings in cash.

Damaging high inflation

The threat of inflation this year and beyond could far outweigh any small changes in interest rates for those with large amounts of money in cash savings. Following many years of low inflation, people may have forgotten how damaging high inflation can be. But in the coming months and years savers should think carefully about where they put any additional cash that is not needed in the short term.

For money beyond your emergency fund, you may want to consider investing, which offers the potential for inflation-beating returns. If appropriate to your particular situation you should be prepared to take some risk to preserve the value of your money, if inflation continues to eat away at the value of your cash in savings accounts. We are best placed to recommend the best investment option based on your attitude to risk.

Source data:

[1] https://www.fca.org.uk/publications/corporate-documents/consumer-investments-strategy

[2] https://obr.uk/overview-of-the-october-2021-economic-and-fiscal-outlook/

[3] https://moneyfacts.co.uk/news/savings/savings-rates-continue-to-rise/

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.