October 2024 - Investing For Tomorrow

The scenario is particularly alarming given that many individuals have diligently planned for retirement yet find their savings insufficient to support their desired lifestyle. The discrepancy between expectation and reality underscores the critical need for robust financial planning and a reevaluation of current pension strategies to ensure that retirees can enjoy the fruits of their labour without undue financial stress.

Ability to afford retirement

Adding to the gravity of the situation, over a quarter (27%) of those who have laid out retirement plans express scepticism about their ability to afford retirement altogether. This lack of confidence stems from various factors, including the rising cost of living and stagnating wage growth, which erodes the value of pension savings over time.

The financial insecurity future retirees face threatens their quality of life and places additional pressure on state and private pension systems. It is imperative for individuals and policymakers alike to address these challenges through comprehensive financial education, improved pension schemes and supportive public policies aimed at enhancing the financial resilience of the ageing population.

Younger generations want earlier retirement

A recent report reveals that younger individuals aspire to retire even earlier. Those aged 18-29 wish to retire at 61, although they are willing to work until 64 if necessary. This is four years shy of the age at which they can access their State Pension.

Only a third (34%) of respondents believe they are adequately preparing for retirement, and 38% are not on track to achieve even a minimum retirement lifestyle, as defined by the Pensions and Lifetime Savings Association. This figure has increased by 3% from last year, equating to an additional 1.2 million people, more than the combined working populations of Liverpool and Birmingham.

Impact of rising living costs

The projected increase in those facing inadequate retirement outcomes is primarily driven by rising living costs, such as a 15% increase in rents, compared to an average wage growth of just 6.2%[2]. Survey participants also highlighted the reliance on the State Pension, with just over half (54%) expecting it to form a significant portion of their retirement income.

Three-quarters (75%) deem the State Pension crucial for covering everyday necessities. However, 12% of respondents doubt that this level of support will be available by the time they retire.

Growing gap in retirement outcomes

The widening gap in retirement outcomes and the quality of later life between current retirees and future retirees is concerning. People are considering how their private pension pots might work in conjunction with their State Pension Entitlement to plan their retirement.
Despite this, reliance on the State Pension remains strong. While some individuals will use their private pension to gain the retirement flexibility they seek, many realise they might have to work much longer than anticipated.

Call for government action

Britain is far from achieving sufficient savings to provide future pensioners with their desired outcomes. In the meantime, it is crucial to help people maximise their existing resources. This is an opportune moment for the new government to adopt a comprehensive approach to financial resilience throughout people’s lives, particularly focusing on those predicted to have lower retirement outcomes.

Source data:
[1] The research was conducted online by YouGov on across a total 5,072 nationally representative adults aged 18+ in the UK between 21/03/2024 – 05/04/2024. Pension and Lifetime Savings Association (PLSA)’s living standards used as a measure. The PLSA defines a minimum retirement as someone living with no car, spending £50 per week on groceries and spending £20 for each birthday and Christmas present. The latest PLSA thresholds have increased from 8-34%.
[2] Index of Private Housing Rental Prices, UK: monthly estimates

THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

Rising inflation and interest rates

Has the squeeze got tighter? Rising inflation and interest rates have created clear winners and losers. Those with mortgages have been among the losers. As fixed rate deals have ended, moving onto a variable or new fixed rate has meant accepting higher payments or extending terms to keep monthly outlays the same.

Coupled with inflation, this has reduced real disposable incomes. The winners have been those who are debt-free and those who have savings and investments. Typically, these individuals are retired, and the increased income may be surplus to requirements.

The cost of education

School fees and care costs have historically risen faster than inflation. The cost of private education has soared. Fees jumped by an average of 5.1% in 2022[1]. The average cost per child is now £6,944 a term for day pupils and £12,344 a term for boarders[2]. There are big regional variations, too. With the rising cost of living, private schools have had little choice but to pass energy and food costs on to parents. Imagine those costs for a family of four.

It is no wonder house prices are so high in the catchment areas of state schools with good Ofsted ratings. Many parents or guardians rely on other sources for some or all of the fees, such as loans, inheritances or other payments.

University and housing

School may lead to university, with its accompanying student debts. Children may be dependent on their parents for longer and not leave the nest as quickly as one might hope. Rising rents mean the aspiration to get on the property ladder may only be achieved after age 30 and will require some financial assistance.

The mounting cost of care fees

If you are paying for care, the average weekly cost of a residential care home in the UK is £1,160, while average fees at a nursing home cost £1,410 per week[3]. This means residential care for a whole year (52 weeks) costs an average of £60,320, and nursing home care costs an average of £73,320 annually. Fees will vary depending on the area you live in and the home you choose.

The families of those in care homes are unlikely to pay the entire bill but may top this up to ensure a better quality of life, such as an ensuite room, visits from the hairdresser, entertainment and day trips. As parents may live some distance away from other family members, time and practicalities may create the need to move closer, leading to inevitable upheaval and losing a friendship network.

Role of inheritance

Our elderly relatives play a crucial role in the upcoming shift in wealth. They’ll be vital in the wealth transfer over the next 10-15 years. The ‘sandwich generation’ – those caring for their children and ageing parents – are set to inherit significant assets. Figures from HM Revenue and Customs (HMRC) show a record-breaking increase in Inheritance Tax (IHT) receipts, reaching £7.5 billion from March 2023 to April 2024. This is a jump of £400 million compared to the previous year and continues a trend that’s been rising for the past two decades.

With an IHT rate of 40%, nearly £19 billion in assets, beyond various exemptions and reliefs, were taxed[4]. The taxman might become the largest single beneficiary if multiple family members inherit. Given the current higher interest rates, the compounding effect of reinvested income can grow wealth even further. Therefore, financial planning is about reducing the size of estates and preventing them from growing too large.

Financial planning and gifting

Using surplus pension and investment income, for example, to help towards grandchildren’s school fees both invests in their future and reduces the growth rate of the estate. The notion of IHT planning may conjure images of esoteric and inaccessible investment schemes, but straightforward gifting can be just as effective.

In addition to utilising various allowances and reliefs available, lump-sum gifts to an individual, known as Potentially Exempt Transfers, will not be subject to IHT if you live for seven years after making the gift. If you die before then, these gifts are initially set against the available nil rate bands, so they may still be tax-free. Lump-sum gifts could be a valuable way to help a grandchild working to be a first-time buyer get a decent deposit together. The average gift for a house deposit is £25,000.

Creating a financial plan

However, for many – possibly the majority – the fear of running out of income and capital mentally eclipses the huge benefits of helping younger generations now, providing the enjoyment of seeing the positive impact on their lives. Creating a financial plan will provide the knowledge and reassurance of knowing you are financially secure, whatever the future may hold. This, in turn, will enable you to consider gifting from income and capital.

An inbuilt reluctance to discuss money matters with family members can lead to poorer long-term financial decisions and more money lost to the taxman. A lack of dialogue will also mean less influence over the choices made for you if you lose capacity – simply because your children might not know what you want to happen. Financial openness across generations is the starting point.

Source data:
[1] Schoolfeeschecker, accessed April 2024,
[2] Schoolguide, accessed April 2024.
[3] www.carehome.co.uk/advice
[4] https://britishbusinessexcellenceawards.co.uk/from-the-awards/inheritance-tax-receipts-reach-a-record-breaking-7-5

THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL, OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

However, the ‘hard stop’ retirement is anticipated to diminish considerably in the future. Only 15% of UK adults believe it will represent most people’s experience in the next 10-25 years, indicating a paradigm shift in how future generations envision their retirement.

Changing retirement trends

The most notable shift between past and future retirement perceptions is a substantial increase in individuals never fully retiring because they want or need to continue working. Currently, 41% of UK adults expect this to be the norm in the next 10-25 years, a significant rise from 13% in the past[1]. This change can be attributed to several factors, including increased life expectancy, the rising cost of living and the desire to stay mentally and physically active.

Research focusing on hopes versus expectations of transitioning to retirement reveals that 44% hope for a ‘hard stop’, 47% hope for a transition period and just 9% hope to keep working. However, the expectations paint a different picture.

Planning for retirement

Only 30% expect a ‘hard stop’, 46% anticipate a transition period and 24% foresee continuing to work. Among those yet to retire who hope for a hard stop, only 52% realistically expect to achieve this, and one in five (19%) believe they will need to keep working. This divergence between hope and reality underscores the complexity of planning for retirement in today’s economic climate.

The concept of a ‘hard stop’ retirement has been replaced mainly by those looking to gradually reduce their working hours, combining part-time work with pensions to supplement their income. This approach allows retirees to maintain a sense of purpose and social connections while easing into retirement. While gradual transition remains popular, our research indicates a significant shift, with more people expecting to work indefinitely. This trend is expected to be driven by financial necessity and personal preference.

Flexible, part-time and remote work

Technological advancements and the rise of the gig economy also play a role, providing opportunities for flexible, part-time and remote work that can be tailor-made to suit the needs of older workers. For instance, consulting roles, freelance opportunities and online businesses allow individuals to leverage their experience and skills without the constraints of traditional full-time employment.

Flexible work environments and savings strategies will need to support the evolving approach to retirement in the future. Many employers will need to consider adapting to flexible working hours, remote work options and phased retirement plans that align with the changing needs of their workforce. Policies must also adapt to allow individuals who wish or need to remain employed longer to do so comfortably. For example, extending the age limits for pension contributions and providing incentives for lifelong learning can help older workers remain competitive in the job market.

Boost retirement savings

Additionally, a concerted effort must be made to help people save more effectively for retirement. Financial education and planning services should be made more accessible to ensure individuals can make informed decisions about their retirement savings.
Millions of adults are currently off track with their savings and might have to delay retirement plans as a result. Addressing this issue will require strategic policy changes to boost retirement savings and provide adequate support for a flexible workforce. For example, increasing employer contributions to workplace pensions and offering tax advantages for personal savings plans could incentivise higher savings rates.

Source data:
[1] Phoenix Insights research conducted by Message House, carried out in January 2024 among 1,502 UK adults. Weighted to be nationally representative.

THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

If you’re contemplating a return to work after a significant absence or considering a phased return, there are several factors to consider. Here, we will explore how ‘unretirement’ could impact your finances, including effects on your State Pension and workplace pensions, as well as potential tax implications.

What returning to work could mean for your pension

Unretiring can be an exciting prospect. Beyond financial considerations, returning to work can offer benefits such as mental stimulation and social interaction. Many individuals contemplating a phased approach to retirement express a desire to keep their minds active and connect to working life.

If you have already started drawing benefits from a workplace pension or the State Pension before returning to employment, there may be specific implications you need to consider.

State Pension considerations

What happens to my State Pension if I go back to work?

If you’ve reached the State Pension age, you should be able to continue claiming it even if you return to work. Conversely, if you haven’t yet reached State Pension age, working and paying National Insurance Contributions (NICs) could increase the amount of State Pension you receive. The State Pension age is 66, rising to 67 by 2028.

To claim any State Pension, you need at least ten qualifying years of NICs and 35 qualifying years to claim the full new State Pension[1]. A qualifying year is a tax year in which you have paid or been credited with enough NICs to count toward your State Pension. If you don’t yet have 35 qualifying years, working longer could boost this, thereby increasing the amount of State Pension you receive.

Can I defer my State Pension if I go back to work?

If you’ve previously claimed your State Pension, you can stop claiming and defer future payments. However, you can only do this once, and you must typically reside in the UK. The State Pension is not given automatically upon reaching the State Pension age; you must claim it.
The government will send you a letter at least two months before you reach State Pension age with details on how to claim. If you wish to defer your pension and haven’t yet claimed it, it will be deferred automatically until you take action. The government provides useful information on how deferring affects your State Pension, available on their website.

Workplace pension implications

Will I get a new workplace pension if I go back to work?

For those under the State Pension age, if you return to employment and earn more than £10,000 a year, you should be automatically enrolled in a workplace pension scheme. You’ll contribute to your pension, as will your employer, and may benefit from government tax relief, which varies based on individual circumstances.

People over the State Pension age

If you’re over State Pension age and return to work, you won’t be automatically enrolled in a workplace pension scheme. Nevertheless, you can opt in up to the age of 74, subject to your earnings[2]. You won’t get tax relief on pension contributions once you’re over 75, although employer contributions might still apply if they choose to do so.

Returning to a previous employer

If you return to a former employer where you had previously contributed to a pension, you might be able to resume contributions to the same pension pot. However, there’s a chance you may need to start a new pot as if you were a new employee. It’s advisable to check with your employer regarding their policies for returning employees.

Potential loss of benefits

Returning to work might affect certain pension benefits, such as a protected pension age. This is when the age at which you can take benefits from your pension is fixed or ‘protected’, even if it’s lower than the Normal Minimum Pension Age (NMPA), currently 55 but rising to 57 in April 2028[3].

Saving and withdrawing from existing pensions

Can I keep saving into or withdrawing from my existing pensions if I unretire?

If you return to work after retirement, you should be able to contribute to a workplace pension up to age 75. Your Annual Allowance permits a total contribution (employer and employee) of £60,000 per year across all pension plans before attracting an Annual Allowance charge[4]. As well as the annual allowance limit, your own tax-relievable contributions are limited to 100% of your annual earnings.

If you’ve already started withdrawing from your pension pots, you may have triggered the Money Purchase Annual Allowance (MPAA), reducing your Annual Allowance to £10,000 each tax year. Only income from a defined contribution (DC) pension affects the MPAA; income from a defined benefit (DB) pension does not trigger it. If you maximise the £10,000 into your DC pension, you can still accrue a pension input amount of up to £50,000 pa in your DB pension before incurring a charge, known as the Alternative Annual Allowance (plus any carry forward that you have available).

Tracking down lost pensions

It’s estimated that over £26.6 billion is sitting in lost and forgotten pension pots, with each pot in the 55 to 74-year-old age group averaging £16,000[5]. Before returning to work, consider tracking down any old pensions you may have. Uncovering these can provide a clearer picture of your financial situation and might influence your decision to unretire. You can search for lost pensions through the government’s Pensions Tracing Service.

Tax implications

What unretiring means for tax

If you’ve reached State Pension age, you’ll continue to pay Income Tax but will not pay NICs on your earnings. An exception is if you’re self-employed and pay Class 4 NICs, which stop at the end of the tax year in which you reach State Pension age. Not paying NICs could offer a significant financial incentive to return to work if you’re above this age threshold.

Your age does not affect whether you pay Income Tax; you’ll continue to pay it if your taxable income, including any private and State Pension income, exceeds your tax-free allowance. The annual standard Personal Allowance is £12,570 for the 2024/25 tax year. NICs must continue following tax rules for those below the State Pension age and returning to work.

Source data:
[1] The new State Pension. Data source, accessed February 2024.
[2] Automatic enrolment if you’re above State Pension age. Data source, MoneyHelper, accessed February 2024.
[3] Increasing Normal Minimum Pension Age. Data source, GOV.UK, 4 November 2021.
[4] Tax on your private pension contributions. Data source, GOV.UK, accessed February 2024.
[5] Lost pensions 2022: what’s the scale and impact? Data source, Pensions Policy Institute, October 2022.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE 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.

This trend highlights a significant shift in retirement planning behaviours, where immediate financial needs or desires often outweigh the long-term benefits of leaving pension funds untouched. Factors such as unexpected medical expenses, the desire to pay off debts or the need for additional income to support a particular lifestyle can drive retirees to access their pension savings earlier than planned.

Consider the timing of pension withdrawals

The implications of early withdrawals are multi-faceted and can significantly impact retirees’ financial security. By withdrawing funds early, retirees potentially miss out on the compound growth that could have been achieved if the money had remained invested. This can result in a smaller pension pot during the later years of retirement when the need for financial stability is often greater.

Furthermore, early withdrawals may indicate insufficient financial planning or awareness about the benefits of delaying pension access. As people live longer and retirement periods extend, it becomes increasingly important for individuals to carefully consider the timing of their pension withdrawals to ensure they stay within their savings.

Financial impact of early withdrawals

The data revealed that the average amount an individual withdraws by age 65 is £47,000. Financial modelling shows how much that £47,000 could grow if invested for longer. If the money stayed invested from age 55 (when the member would have first been able to take benefits) for an additional five years, they would have £13,925 more on average by the time they reach 60.

That figure rises to £24,661 if it were to stay invested for ten years to age 65 – a rise of more than 50%; and to more than £38,000 if invested to age 70. A separate modelling exercise was conducted assuming that individuals claimed the maximum tax-free cash available at age 55, which currently stands at 25%, equivalent to £11,750.

Maximising pension benefits

If the same modelling were run with the remaining £32,250 left in individuals’ pots after taking the tax-free cash, savers would, on average, be £10,441 better off after five years and £18,496 after ten years if they decided to stay invested. These figures highlight the significant financial benefits of delaying withdrawals and allowing pension funds to grow.

The data further shows that most people withdraw money from their workplace pension before retirement age. While early withdrawals are often unavoidable, draining a pension pot too soon can carry substantial risks, which providers and retirees should be aware of and take steps to guard against where possible.

Navigating a changing pensions landscape

The pension landscape is ever-changing. People are living longer, which means pensions must cover longer retirements. Additionally, more individuals are choosing to phase into retirement with part-time work, changing how and when they access their pension funds.
Early withdrawals can severely impact the long-term financial stability of retirees. Therefore, individuals must seek professional financial advice to make informed decisions about their pension pots.

Planning for a secure retirement

Retirees should also consider other sources of income and investments that can support them during their retirement years. Diversifying income streams can provide a safety net and reduce the need to dip into pension funds prematurely.

Proper financial planning ensures that retirees can maintain their desired lifestyle without compromising their financial security. By understanding the implications of early withdrawals and exploring alternatives, retirees can make decisions that will benefit them in the long run.

Source data:
[1] The statistics cited were the result of an analysis by Scottish Widows on 232,654 different retirement claim transactions between 2019 and 2023, which has been used from different sources to give a single view.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE 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.

Your contributions will generally benefit from tax relief, although how this works depends on your circumstances and the scheme you contribute to. The value of any tax benefit is also contingent on your situation. If you’re paying into a workplace pension, your employer will also contribute.

Accessing your pension pot

You can access your pension pot starting at age 55, though this age will increase to 57 in April 2028. Exceptions apply, for instance, in cases of ill health[1]. It’s important to remember that the age at which you can access your State Pension is higher compared to personal or workplace pensions.

Why consider increasing your contributions?

Increasing your pension contributions could significantly boost your savings, potentially enhancing your standard of living in retirement. The Pension and Lifetime Savings Association suggests that a single-person household outside of London needs £31,302.40 a year for a moderate retirement lifestyle[2]. This comprises the full State Pension of £11,502.40 a year for the 2024/25 tax year plus £19,800 a year from personal pension savings.

Getting back on track

If you’ve realised that your savings are not on track and can afford to do so, increasing your contributions will potentially give you more time to get back on course. Remember, contributing to a pension can be tax-efficient as well. In a workplace pension, some employers might offer enhanced contributions you can use. We’ll delve deeper into this later.

Is increasing contributions right for you?

Deciding whether to increase your pension contributions is a personal decision that hinges on your circumstances. Consider your other financial priorities, such as paying off debts, a mortgage or building an emergency fund. Once you’ve reviewed your outgoings and anticipated future expenses, you’ll have a clearer idea of whether increasing your pension contributions is feasible.

Ways to boost your pension contributions

We can advise how to increase your pension contributions by updating your online pension account or speaking to your employer or pension provider.

Here are some steps to consider:

Make the most of employer contributions

In some workplace pension schemes, employers will increase their contribution to your pension pot when you do. They may even match your contributions up to a certain amount. If this is an option for you, it could be an easy way to augment your pension pot with minimal extra effort from you.

Consider salary sacrifice

Check whether your employer offers ‘salary sacrifice’. Instead of making personal contributions directly, your gross salary is reduced (‘sacrificed’) and, in return, your employer increases their pension contribution by at least the same amount. You don’t pay Income Tax or National Insurance contributions (NICs) on the sacrificed amount.

Depending on the structure of the salary sacrifice arrangement, your employer’s pension contribution could be increased by some or all of the savings in NICs. It’s a complex subject, but your employer can explain how it works for you if offered.

If you finish paying off a purchase

If you’ve been comfortably making regular repayments on a loan, car or holiday, consider redirecting that money into your pension once the repayments are complete. If you’re not missing the extra income in your bank account, it might be easy to save more without noticing.

Pay In lump sums

If you come into extra money, such as from a bonus, gift or inheritance, consider investing some or all of it into your pension pot. If the lump sum is substantial, remember the Annual Allowance, which is the total amount that can be paid into your pension each tax year without suffering a tax charge. The current Annual Allowance is £60,000 (2024/25). However, ‘carry forward’ rules may allow you to pay more before being taxed. Your own tax-relievable contributions can’t exceed 100% of your annual earnings.

Generate additional income

If you need to boost your retirement savings, consider generating additional income through side hustles or converting your skills into earnings. Ensure you check your employment contract to avoid breaching any regulations that could impact your main job.

Now that you’ve explored ways to increase your pension contributions and why you might consider doing so, setting goals to help you save towards the retirement you envision could be a wise next step.

Source data:
[1] When can I take money from my pension? Data source, MoneyHelper. Accessed February 2024.
[2] Retirement Living Standards. Data source, Pension and Lifetime Savings Association. Accessed February 2024.

THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE 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 Overgate Hospice Annual Charity Ball is one of the most prestigious events on the Overgate calendar and one of their biggest fund-raisers. As such Investing For Tomorrow were proud to be sponsors for the evening.

In 1981 Overgate Hospice was established for the people of Calderdale providing specialist care. It costs approximately £8,500 a day to run Overgate and £3.3 million a year. Sadly, only 18% of this is funded by the Calderdale Clinical Commissioning Group, with the rest coming from traditional fundraising activities by the general public.

Thanks to the incredible kindness of the guests, the event raised an astounding £70,000! This remarkable achievement will go directly towards funding a much-needed overnight relatives’ room as part of Overgate’s Big Build Appeal. The relatives’ room will offer a comforting space where loved ones can stay close to their family members during the most difficult times.

The 2024 Autumn Budget will be delivered by Chancellor Rachel Reeves on Wednesday, October 30th.

The budget speech is usually around an hour long and begins at around 12:30 UK time. The 2024 Autumn Budget is expected to include significant tax changes and measures to raise revenue for the government.

After the speech, the Treasury will publish a report with more details on the announced measures and their costs. The Office for Budget Responsibility (OBR) will also produce an independent assessment of the UK economy.

We will also publish our own guide of what the budget will mean for you and your money (including any changes to pensions, capital gains and inheritance tax) which you will be able to download from our ‘SmartMoney’ archive here.

This move could potentially free up more disposable income, allowing you to enjoy your retirement with fewer financial burdens. Additionally, the emotional comfort of owning your home outright and eliminating mortgage debt can provide significant peace of mind, making this option worth considering.

Fraught with potential pitfalls

However, paying off your mortgage early using your pension lump sum is fraught with potential pitfalls that require much greater evaluation. While the immediate financial relief is tempting, there are complex tax implications and long-term financial consequences to consider. For instance, withdrawing more than the tax-free portion of your pension can result in hefty tax liabilities, which might negate the benefits of reduced mortgage payments.

Moreover, depleting your pension fund early could compromise your retirement income, potentially affecting your quality of life in the future. Given these nuances, assessing your unique circumstances and seeking professional financial advice is essential to determine the best course of action.

Here are some key points to ponder as you navigate this significant financial decision.

Tax implications

You can access most workplace and personal pensions from age 55 (or 57 from April 2028) and use the money as you wish. However, while you can withdraw the first 25% as a tax-free lump sum (capped at £268,275 for most people), any additional withdrawals will be taxed at your marginal Income Tax rate.

If your 25% tax-free lump sum doesn’t cover your outstanding mortgage, making a taxable withdrawal to pay it off in full probably won’t make financial sense as it would trigger a range of additional tax considerations. It’s imperative to weigh the tax implications carefully before making any decisions.

Interest rates and mortgage payments

When interest rates are low, you’re probably better off leaving your money in your pension. This is because the potential growth rate in your pension is likely to be higher than your mortgage interest rate. There are some instances where paying off your mortgage might be the better option, so make sure you seek advice on what’s right for you.

When interest rates are high, it isn’t quite as straightforward. It may still be the case that your pension fund has the potential to grow at a greater rate and benefit you more in the long run than paying off your mortgage early would. It’s also worth remembering that most lenders only let you overpay your mortgage by 10% yearly.

Early redemption repayment charges

If you go over this amount while in a fixed rate deal, you might have to pay an early repayment charge (ERC) of between 1% and 5% of the outstanding balance. Before making any overpayments, make sure you check when your deal is due to end. Planning ahead can help you avoid these potential penalties.

Impact on retirement income

Taking money out of your pension to pay off your mortgage could have longer-term repercussions. A smaller pension pot will generate less income in retirement, which means you might be unable to afford the lifestyle you were hoping for or, worse, run out of money. This could far outweigh the short-term benefit of having lower monthly outgoings for a few extra years.

By using cashflow modelling, we can demonstrate how long your money will last in retirement and the impact that paying off your mortgage early would have on this. Withdrawing money from your pension could be especially detrimental during a stock market downturn.

Market fluctuations

If you sell investments that have fallen in value, you could deplete your pension pot more quickly than you anticipated. By leaving the money invested, your pension will have the opportunity to recover from dips in stock market performance and hopefully go on to produce a healthy and sustainable retirement income over the long term.

Exploring other options

If you do want to pay off your mortgage, there are other ways to fund this other than via your pension. Individual Savings Accounts (ISAs), for example, let you withdraw as much money as you wish tax-efficiently. ISAs also form part of your estate for Inheritance Tax purposes, whereas pensions typically do not.

Depleting ISAs before pensions could make sense if you want to leave a tax-efficient financial legacy for your loved ones. In a stock market downturn, however, withdrawing money from cash ISAs and savings accounts could be a better option, as you’ll leave your investments untouched and give them the chance to recover in value.

The urgency of addressing climate change cannot be overstated, but it is not our only challenge. We must also confront the rapid loss of biodiversity, which threatens the natural balance of ecosystems, and the pervasive problem of plastic pollution that chokes our waterways and oceans.

Integrating sustainable practices into our daily lives

Sustainability is not merely a ‘nice to do’ but an indispensable necessity. Integrating sustainable practices into our daily lives and investment decisions is crucial for creating a liveable future. By prioritising sustainability, we help preserve the environment and foster a society that values long-term wellbeing over short-term gains.

This shift in mindset is essential for addressing the complex and interconnected issues we face. Investing in sustainable solutions and companies that adhere to ethical practices can drive positive change, ensuring that our economic activities support the planet rather than deplete it.

Putting sustainability at the heart of your decisions

Our everyday choices are guided by our values and beliefs, whether consciously or not. For example, we’re likely to think twice about buying clothes from a fast-fashion retailer that has been found to exploit its workforce. We rarely know the full story behind the products we buy, but when unethical and unsustainable practices come to light—and they increasingly do—our moral compass kicks in.

Understanding responsible investing

Many terms are used, but responsible investing – or you may know it as sustainable or ESG (Environmental, Social and Governance) investing – is about taking this ‘full story’ into account. It’s essentially asking a wider range of questions about how wisely a company is managed and whether it is acting in harmony with the kind of world we want to live in. This may seem like common sense, but it wasn’t long ago that ESG factors tended to be overlooked compared to financial information, such as a company’s profits and cash flows.

The evolving landscape of ESG factors

But fund managers, regulators and investors are now aware that these factors are just as important in assessing a company’s likely future health. Our investment choices can drive change, influencing how businesses operate and their impact on the world. Aligning personal values with investments can lead to more ethical and sustainable outcomes, benefiting society and the environment.

Aligning your personal values with your investments

Your pension is not just a pot of money you and your employer add to over time. Through our retirement savings, we’re all likely to be shareholders in (and lenders to) companies worldwide. We can choose what types of funds we invest in, and as shareholders, we can influence how companies are managed through the providers and fund managers who look after our pension savings.

The concept of stewardship

This is often referred to as ‘stewardship’ and can be practised by any fund, whether it has a sustainability label or not. Some funds go a step further and explicitly target positive environmental and social impacts alongside financial returns. These investments aim not only to generate profits but also to benefit society and the environment.

Questions to consider when reviewing your investments

Most pension savers are invested in a scheme default fund – the fund that is automatically selected for you if you don’t make an active choice yourself. Increasingly, default funds consider ESG factors, but they may do this differently. For example, they may exclude certain types of companies from investment – such as those involved in tobacco production, controversial weapons or thermal coal extraction.

Evaluating your pension fund

They may also increase or decrease the weighting (the percentage invested) in companies based on a specific factor, such as carbon emissions or ESG scores. A small amount of research – simply logging into your pension account and looking at the factsheets for the funds you’re invested in – will help you understand whether they align with your values and preferences.

Investing your money in a more purposeful way for societal good

It’s about asking questions: What is my pension fund doing to include sustainability considerations? Are the underlying investments in my portfolio aligned with my values? If they’re not, is my fund manager voting and engaging to nudge misaligned companies in the right direction? Or are there more suitable funds for me?

Making a difference for the benefit of people and the planet

We’re all looking for ways to help make a difference for the benefit of people and the planet. While taking the more obvious actions such as recycling and taking public transport is important, ensuring that our pensions are invested sustainably and aligned with our personal values could also positively influence our world. Navigating different responsible investment approaches and funds isn’t easy, so obtaining professional financial advice is important to discuss which investments are right for you.

THE VALUE OF YOUR INVESTMENTS CAN GO DOWN AS WELL AS UP, AND YOU MAY GET BACK LESS THAN YOU INVESTED.

THE TAX TREATMENT IS DEPENDENT ON
INDIVIDUAL CIRCUMSTANCES AND MAY BE SUBJECT TO CHANGE IN FUTURE.