Passing wealth down through the generations

Millions of retirees help out in cost of living crisis.

The rise in the cost of living is affecting millions of people. A third of young adults (18-34) and families with young children are struggling financially. Many are turning to family and friends for help with day-to-day expenses such as utility bills, housing costs and childcare, according to new research[1].

One striking aspect is the extent to which grandparents are stepping in with thousands of pounds of support and helping grandchildren with housing deposits in addition to everyday expenses.

Options available

It’s understandable why grandparents want to help their family and pass wealth down through the generations. When doing this, there are a number of options available, each with different advantages and disadvantages.

Gifting money early can reduce Inheritance Tax liabilities and a grandparent can gift up to £3,000 a year without being added to the value of their estate. Currently, a couple could therefore gift £6,000 a year. If some or all of it was invested in a pension it would receive tax relief.

Gifting money

Grandparents interested in helping a grandchild save for a house could also consider saving into a Lifetime ISA (LISA). Only the child/grandchild, as the account holder, can open and manage their LISA but it’s possible to gift money to an account holder to pay into their LISA.

Those helping grandchildren, the research highlighted, gave £15,000 on average, while 10% gave over £50,000. The main reasons grandparents helped out grandchildren financially were to help with day-to-day costs (43%) and help with bills (37%). One in four (24%) grandparents gave money to help their grandchildren buy a house.

Saving for a child or grandchild

Parents and grandparents have several options when saving for a child or grandchild. Choosing the right one can make a big difference.

Contributing to a pension

Although most people won’t set up a pension until they reach working age, a Junior Self-Invested Personal Pension (SIPP) can be started as soon as someone is born. In addition, any contributions made by a parent or grandparent, which can be made directly to the plan as ‘third-party contributions’, will be treated for tax relief purposes as if they were made by the beneficiary themselves.

This means that contributions paid to a ‘relief at source’ scheme will currently receive tax relief of 20% (£20 for every £80 net contribution) as long as the gross contributions do not exceed the beneficiary’s relevant UK earnings for the tax year or £3,600 if more.

In addition, where a beneficiary has paid Income Tax at a higher rate, they will be able to claim the difference directly from HM Revenue & Customs through self-assessment, so a further 20% for a higher rate (40%) tax payer on some or all of the contributions.

Although a child under the age of 18 is unlikely to have relevant UK earnings, total contributions up to the ‘basic amount’ of £2,880 net (£3,600 gross) can be made each year and will still benefit from tax relief.

Pension contributions can be one of the more tax-efficient ways to gift money to a child or grandchild, but the money is likely to be inaccessible until they reach age 57 (normal minimum pension age is rising from 55 to 57 in April 2028).

Lifetime ISAs (LISAs)

If the child or grandchild is aged between 18 to 40, helping them save into a lifetime ISA (LISA) can be beneficial, especially if they are trying to raise a deposit for a first home. This is because the government will add a 25% bonus to subscriptions of up to £4,000 a year (i.e. £20 for every £80 subscribed).

However, if withdrawals are made for any purpose other than purchasing a first home, a tax penalty of 25% (i.e. £25 on a withdrawal of £100) will apply unless the individual is terminally ill or aged 60 or above. Since the tax penalty exceeds the initial bonus, it is normally not the most tax-efficient investment if the penalty is likely to be incurred.

Only the child or grandchild, as the account holder, can open and manage their LISA but it’s possible to gift money to an account holder to pay into their LISA.

Trusts

For those who want more control over how money is spent, setting up a trust can help ensure any investment is used appropriately. There are a wide variety of trusts that can be used to meet individual requirements.

Source data:
[1] Research from LV= highlights how millions of people have helped friends and family financially in the past six months. The LV= Wealth and Wellbeing Monitor – a quarterly survey of 4,000 UK adults – reveals that many people struggling with everyday living costs are turning to family and friends for support 23/08/22.

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

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAXATION AND TRUST ADVICE. TRUSTS ARE A HIGHLY COMPLEX AREA OF FINANCIAL PLANNING.

How to maximise the value of pension savings

Mistakes to avoid when you’re aiming to build your pension pot.

Many people are feeling the pressure on their finances at the moment due to the backdrop of rising inflation and the cost of living soaring. In these circumstances, it can be difficult to think about your long-term finances or even contemplate saving for the future.

However, even in the current climate there are ways to maximise the value of any pension savings you do have. By sidestepping seven common mistakes, you could take your pension planning to another level and reduce the risk of falling short of money later.

Simple rules to follow when retirement planning and mistakes to avoid

Don’t turn down money from your employer

When offered the opportunity to join a workplace pension, it’s nearly always a good idea to do so. For most people, your employer must automatically enrol you in a workplace pension scheme, and you may even be offered a pension plan if you don’t meet the criteria.

Workplace pension schemes are made up of your own payments (5% or more of earnings), which are deducted from your salary, in some cases before you pay tax, making it easier to save, and your employer’s contribution, which at the very least, must be equivalent to 3% of your qualifying earnings. Many employers offer more than this or match any extra payments you make, so it’s worth checking if you’re getting the most out of this valuable benefit.

Don’t say ‘no’ to extra money from the government

Anyone who decides against investing in a workplace or personal pension also turns down help from the government. That’s because in order to encourage people to save for retirement, the government provides a top-up called ‘tax relief’ to pension payments. How you receive this tax relief depends on the type of plan you have and the rate of income tax you pay.

But as an example, if you’re a basic rate taxpayer saving into a personal pension in the current tax year, you receive 20% tax relief on your payments. So, if you pay £200 a month into your pension plan, the £40 of tax relief you receive on that payment means it will only cost you £160. Higher rate or additional rate taxpayers could claim back even more.

Some workplace pension schemes offer tax relief in a different way, such as through salary sacrifice or exchange schemes, so check with your employer if you’re not sure how this works for you. And in Scotland, the tax relief details differ slightly. But in all these cases, the general point is the same: each time you defer paying into a pension plan, you miss out on an extra boost.

Don’t expect the State Pension to cover everything

Another common mistake is to assume that the State Pension will meet your retirement needs. However, it’s important to know that the State Pension won’t be available until your late 60s and may not cover all of your outgoings.

Currently, pensioners who are entitled to the full new single-tier State Pension receive £185.15 a week in 2022/23, worth £9,627.80 for the year. But remember that what you get depends on your National Insurance record, so you could get less.

Pensioners that reached State Pension age before April 2016 and receive the basic State Pension get £141.85 a week, or £7,376.20 a year.

Don’t lose track of your pension plans

It has never been more important to keep track of all your old pension plans. You are at most risk of having lost track of a pension if you have changed jobs multiple times, moved home often and not updated your pension providers or opted out of SERPS (the State Earnings-Related Pension Scheme) in 1980s or 1990s.

Don’t assume that the minimum is enough

Auto-enrolment has boosted the pension savings of millions of people but the 8% minimum payment may not get you the retirement lifestyle you want. It’s important to therefore have a retirement lifestyle in mind. We can discuss with you how much money you could have in your pension pot in the future, so you can ensure that you don’t find yourself in a situation whereby you have an income shortfall.

Don’t leave your pension pot unloved or neglected

You might not want to talk about your pension plan every day, but dismissing pensions as boring is a mistake, and one that becomes increasingly serious over time. While this might be difficult at the moment, steps such as topping up your payments, especially in your 20s, 30s or early 40s, can make a large difference, thanks to the snowball effect of compounding.

Knowing whether it’s workplace or private, understanding how to get more ‘free’ payments from your employer or the government, or using it to pay less tax (such as through bonus sacrifice) could make a major difference to your long-term finances.

Don’t suppose that one pension plan is the same as another

A related mistake is not knowing where your pension pot is invested, whether that matches your life-stage and priorities or how to choose the right investment options. For example, if your retirement is still some years ahead, you could potentially afford to take a little more risk. Conversely, you may want to dial down the risk as you get nearer to retirement.

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.

Working 9 to 5

More over-65s are still working than six years ago.

More people in the UK aged between 65 and 74 are still working compared to six years ago, new research shows[1]. The findings show there’s a marked increase in the number of people over 65 who remain in the workforce compared to 2016, and a fall in the number drawing their State Pension.

At a time of rising cost of living pressures, the data shows fewer people across all age groups eligible to retire have done so compared to six years ago. The greatest shift has been for those aged between 65 and 74. Whereas 92% of this age group were already retired in 2016, only 79% are now.

Disproportionately impacted

This is due to increases in the State Pension age, which was raised from 65 to 66 between December 2018 and October 2020 – and is set to rise further in future. The increase has disproportionately impacted 65 to 74-year-olds, who have been directly affected by this change in the last six years.

In 2016, 96% of people in this age range said the State Pension accounted for some of their income, compared with 71% now. This represents a 25% decrease in the proportion of people in this age bracket receiving part of their income from the State Pension.

Alternative sources of income

As the State Pension Age continues to rise, this age group will need to plan to find alternative sources of income. The research results show the gap is only partially being plugged by people continuing to work for longer.

There has only been a small rise in those saying wages or other earned income constitute a portion of their overall income – 23% versus 18% in 2016. For a fifth of people in this age bracket, an income gap left by State Pension deferral has not been replaced by wages.

Running out of retirement money

In the UK, the 65 to 74 age group is larger than ever before, according to the 2021 Census statistics[2]. People between those ages now account for almost 19% of the UK population, compared with 16% a decade ago.

For those over 65, money worries about retirement figure more prominently than six years ago. In 2016, only 1% of this cohort said they were worried about running out of money in retirement, while another 1% said they wouldn’t have enough money to fulfil plans and dreams such as travelling. Six years on, the proportion has risen substantially to 11% for both.

Amount of capital held in property

One asset that has grown for this age group, however, is the amount of capital they hold in property. Sixty-five to 74-year-olds have, on average, lived in their current house for 24 years, which means they have benefitted from nearly all the property price increases that have occurred since the late 1990s, when the current property boom began.

In 1998, when this age group typically bought their current house, the average cost of property in the UK was £66,231[3]. The research results show this age group’s property is now worth on average £302,000, more than four times the original purchase price.

Planning for a comfortable retirement

Nearly two-thirds of them own their property outright. Typically, those who do have been in tenure six years longer than those with a mortgage.

This suggests people may have accumulated more wealth in this asset than they realise. As cost of living pressures ramp up, the equity in people’s homes could become increasingly important when looking at ways to plan for a comfortable retirement.

Source data:
[1] Aviva Real Retirement Report conducted by ICM Unlimited April 2016. 1,506 general consumers aged 45+ Research conducted by Censuswide April 2022.
[2] 2021 National Census figures released by ONS
[3] HMLR’s UK House Price Index. www.gov.uk/government/collections/uk-house-price-index-reports

Balancing risk and returns

Bonds can play a key part in building an investment portfolio.

UK government bonds, also known as gilts, are debt securities issued by the UK government. They are used to finance the government’s borrowing requirements and are often seen as a safe haven asset by investors.

Gilts are traded on the London Stock Exchange and the payments on gilts are fixed, meaning that they provide a predictable income stream for investors.

Fixed income portfolio

Investors who place large portions of their portfolio in fixed income investments are usually looking for a regular, secure income stream. They are often retired and reliant on their investments or pension to provide a monthly income.

Gilts are typically issued with maturities of between one month and 30 years. During that lifetime, they usually pay a set amount of annual income – the ‘coupon’. They can be held to maturity or sold prior to maturity if the investor needs access to the funds.

Significant growth

The UK government bond market is one of the deepest and most liquid markets in the world. It is also one of the most important financial markets. The size of the UK government bond market has grown significantly in recent years.

The main factors affecting the price of bonds are: Interest rate risk – the direction interest rates are moving; Credit risk – the perceived risk associated with the issuer; Duration risk – the amount of time left before the issuer has to repay the bond holder.

Heightened volatility

Shorter-dated bonds – those that will redeem within five years – are less price sensitive to interest rate movements than longer-dated bonds. This means prices tend to move up or down less when interest rates rise or fall.

Following the Mini-Budget and the government’s fiscal plan announcements on September 23, the UK government bond market experienced heightened volatility, with the market posting some of its largest daily swings on record.

Interest rate hikes

As a result, gilt yields rose steeply as investors assimilated the expected £62.4bn increase in gilt sales over 2022/23, and substantially increased their expectations of interest rate hikes from the Bank of England. On the day of the announcement, the ten-year UK government bond yield rose from 3.45% before the Chancellor’s statement to end the day at 3.83%, marking its largest one-day move for more than 30 years.

As a result, gilt indices fell 2.6% on the day. The yield subsequently rose above 4.5% before falling back to around 4% by the morning of Friday 30 September. This followed the Bank of England announcing on Wednesday 28 September a large-scale purchase.

Emergency intervention

The Bank launched its emergency intervention after an unprecedented sell-off in long-dated UK government bonds that threatened to collapse multiple liability driven investment (LDI) funds, widely held by UK pension schemes. On the day the Bank of England stepped up its bond-buying support, the International Monetary Fund stated that a ‘change in fiscal policy’ would help calm bond markets.

There are some mitigating factors that provide greater context to the market reaction, such as the fact that the Mini-Budget came at a time when global markets were looking fragile, with US bond yields and the US dollar both moving higher for much of September. Still, the relative moves compared to US and European equivalents suggest that there were clearly UK-specific factors at play following the Mini-Budget.

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

Unretirement

More over-50s returning to work amid cost-of-living crisis.

Older workers have been leaving the jobs market in their droves over the past two years, partly due to many re-evaluating what they want from their lives and careers during the course of the COVID-19 pandemic, and also due to the devastating impact the pandemic had on the prospects for many older jobseekers, who felt they had no choice but to leave the workforce.

But the cost-of-living crisis is now affecting some pensioners drastically, with more older people starting to return to work amid the ongoing crisis, new research has highlighted[1]. The findings identified economic activity levels among the over-50s are now at their highest since the pandemic began.

Impacting pensions

Analysis of official statistics appears to show the first signs of a return to the long-term trend of more economically active people over the age of 50 – a decades-long trend which, it said, was reversed by the pandemic.

Spiralling inflation and turbulent financial markets impacting pension funds are causing some people to unretire and find work again. There has been an increase in economic activity (those in work or looking for work) of 116,000 among the over-50s in the past year. More than half of the increase is being driven by men over the age of 65.

Retiring comfortably

In some ways, the pandemic forced the hands of many and gave them an opportunity to trial retirement. An early retirement can often seem like a dream when you’re stuck in the thick of the daily grind but, for many, giving up work abruptly can also result in a loss of structure, social connections and purpose, which can leave people feeling lost at times.

The current economic climate means that some people who thought they could retire comfortably during the pandemic are now having to unretire and find work again to bring in some extra income and top up their pensions while they still can.

Source data:

[1] Analysis by www.restless.co.uk – Economic activity levels amongst people over the age of 50 hit their peak of just over 11 million just before the pandemic in the three-month period from December 2019 – February 2020. Since then, we have seen a decades-long trend reverse, with economic activity levels of workers aged over 50 falling by as much as 223,000 during the pandemic.

Bridging the gender pensions gap

Women left with half the pension pot, no matter the job.

We’ve all heard about the gender pay gap, but very few discuss the gender pensions gap, despite the fact so many women experience it. Women’s pensions at retirement are half the size of men’s, regardless of the sector they work in, new research has highlighted[1].

The gender pension gap is the percentage difference in income between men’s and women’s pensions and it begins at the very start of a woman’s career.

Long-term financial impact

The research found that every single industry in the UK has a gender pensions gap, even those dominated by female workers. Considering women are likely to live four years[2] longer than men, this issue deepens as they need to have saved around 5% to 7% more at retirement age.

Worryingly, more than a third (38%) of women who have taken a career break were not aware of the long-term financial impact it would have on their pension.

Three key industries

According to the research, the gender pensions gap exists regardless of average pay across different sectors, and ranges from a gap of 59% in the healthcare industry, to 13% in courier services.

The healthcare (59%), construction (51%), real estate/property development (48%), pharmaceutical (46%), aerospace, defence and government services (46%), and senior care (45%) sectors were found to have the largest gender pensions gaps. Of these six sectors, three are key industries for female employment – healthcare, pharmaceuticals and senior care[3].

Lower pensions contributions

There are many reasons for the gender pensions gap, ranging from women holding fewer senior positions and being paid less, resulting in lower pensions contributions, to the fact they are more likely to take career breaks due to caring responsibilities.

Of those that have taken a career break, 38% did not know the financial impact it had on their pension contributions[4].

Gender confidence gap

Another potential driver is a significant gender confidence gap when it comes to managing pension pots. More than a quarter (28%) of women said they had confidence in their ability to make decisions about their pension, compared to almost half (48%) of men[5].

This lack of confidence extends further to other financial decisions, with women less likely than men to feel confident managing their investments (22% of women versus 41% of men), and their savings (56% of women versus 67% of men).

While many factors behind the gender pension gap are out of most people’s control, there are some actions you can take to help reduce it:

Contribute as much as you can to your pension – and start early.
Compound interest remains hugely underrated and poorly understood by both some men and women.
Check the charges on your historic pension pots. If appropriate, see if consolidating your pots will bring them down.
Check how much your State Pension will be and when you’ll get it. If it’s not going to support your ideal lifestyle, plan how you’ll cover any shortfall.
Put a bit more into your pension whenever you get a pay rise.
Talk through your pension planning with your partner.
Make sure you know about each other’s saving plans, contribution limits and that you are both on the same page.
Keep a regular eye on your pension to make sure you’re in full control of it and saving for your ideal future.

Source data:

[1] The analysis is based on LGIM’s proprietary data on c.4.5 million defined contribution members as at 1 April 2022 but does not take into account any other pension provision the customers may have elsewhere.
[2] ONS: Life expectancy at birth in the UK: 82.9 years for women vs 79 years for men; Office for National Statistics, 2018 – 2020. Average four years.
[3] According to the ratio of female members across the Legal & General book of business.
[4] Legal & General Insight Lab survey of 2,135 workplace members was conducted between 4–26 July 2022.
[5] Opinium survey of 2,001 UK adults was conducted between 4–8 February 2022.

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.

How to protect you and your family’s future

What kind of protection insurance do you need?

There are various complex risks in life that we all face, such as serious illness, an accident or death. What would happen if something were to happen to you? Would your family be able to cope financially with the impact an unexpected event might have?

These are not easy questions to ask but it is important to consider what would happen if an unexpected event or accident took place, and how you could protect your family from the financial effects of serious illness or death.

Big part in our lives

Deciding what your priorities are and understanding what options you have are key parts of the protection planning process. This helps you ensure that you have the financial protection most suitable for your circumstances. Every family is different, but they often play a big part in our lives. It’s important to think about how we can protect them against the unexpected as best we can.

Protection for the unexpected:

Life insurance

Death is an unpredictable event, so it’s important to make sure you have the right level of cover in place. The amount of life insurance you need will depend on your individual circumstances. There are many good reasons to take out a policy. For example, if you have dependents who rely on your income, then life insurance can provide financial security for them if you die.

There are different types of life insurance available, so choosing the right policy for your needs is key. Term life insurance provides cover for a set period of time, while whole of life insurance covers you for your entire life. You can also choose between level term insurance, which pays out a fixed amount if you die during the term of the policy, and decreasing term insurance, which pays out less as the policy progresses.

There is also a variation on the basic term assurance theme that is often worth considering as it can reduce the cost of cover. Family Income Benefit is a policy with a sum assured that reduces uniformly over time but provides regular payments of capital on the death of the breadwinner (the life assured).

If you have any debt, such as a mortgage, then it’s also important to take out life insurance to make sure that this is paid off if you die. This will give your loved ones peace of mind and prevent them from being burdened with debt.

Income protection insurance

There are a number of reasons why income protection insurance should be a part of your protection planning. Firstly, it can help to protect your income if you are unable to work. This could be due to an illness, injury or disability that means you are unable to work. It can help to cover the costs of your everyday living, such as your mortgage or rent, bills and food.

If you do not have sufficient protection in place this may mean you have to rely on your savings, or on the help of family and friends. Income protection insurance is especially important if you are self-employed or have a family to support. If you are unable to work, your income protection policy will provide you with a replacement income so that you can continue to meet your financial obligations.

There are different types of income protection insurance policies available, so you should obtain professional financial advice to ensure you can compare the different options and fully understand the terms and conditions of the policy.

Critical illness cover

If you become seriously ill or are diagnosed with a specified critical illness, even if you are still able to work, critical illness cover could provide you with a financial safety net. It can help to pay for treatment, to make adaptations to your home or lifestyle, provide an income for your family if you are unable to work or other costs associated with your illness.

In some cases, it may even pay out a lump sum if you die as a result of your condition. The tax-free money from the policy could be used to help cover the cost of treatment, make adaptations to your home or lifestyle or provide an income for your family.

There is no guarantee that you will not experience a critical illness during your lifetime, so it is important to have this type of cover in place. It will give you the peace of mind of knowing that you and your family are financially protected if the worst were to happen. Critical illness cover is not a substitute for health insurance.

INCOME PROTECTION INSURANCE PLANS HAVE NO CASH IN VALUE.

IF PREMIUMS ARE NOT MAINTAINED COVER WILL LAPSE.

Bringing pensions together

What to consider if you have multiple pension pots.

The employment landscape has evolved significantly over the last few decades and changing jobs multiple times before retirement is now very much the norm. But did you know, there is an estimated £9.7 billion of unclaimed UK defined contribution pension funds?[1].

Over time, it is easy to lose touch with pension savings providers as we change jobs, move home and the companies we have worked for change ownership or close down.

All these events over time may make it very difficult to find your valuable pension savings. So that means potentially ending up with a number of different pension pots. If you’re one of the millions of people with multiple pensions, it may be appropriate to consider consolidating your defined contribution pension pots and bring them together.

Number of different pensions

Even if you have not had many jobs, you could still have a number of different pensions to keep track of. If appropriate, pension consolidation can simplify your finances and make it easier to keep track of your retirement savings.

Having said this, not all pension types can or should be transferred. It’s important to obtain professional advice so you know and can compare the features and benefits of the plan(s) you are thinking of transferring.

What is pension consolidation?

Pension consolidation is the process of combining multiple pension pots into one single pot. This can be done with a pension transfer or by opening a new pension and transferring your other pensions into it. You may want to do this to make it easier to keep track of your retirement savings, or to try and get a better rate of return on your investment.

But there are a few things to consider before consolidating your pensions, such as any exit fees that may be charged, and whether or not you will lose any valuable benefits such as guaranteed annuity rates.

Consolidating your pensions:

Reasons why you might want to consolidate your pensions

Simplify your finances: If you have multiple pension pots, it may be difficult to keep track of them all. Consolidating your pensions into one pot could make it easier to manage your retirement savings.

Save on fees: If you have multiple pensions with different providers, you may be paying multiple annual fees. Consolidating your pensions may help you save money on fees.

Get better investment options: Some pension providers offer a limited number of investment options. By consolidating your pensions it could give you access to a wider range of investments.

Reasons why you may not want to consolidate your pensions

Loss of valuable benefits: One key disadvantage is that you may lose out on valuable benefits that are specific to certain pension schemes. For example, some schemes may offer better death benefits than others, so consolidating your pensions into one pot could mean giving up this valuable protection.

Paying higher fees: Another potential downside is that some schemes may have higher charges than you are actually currently paying, which means you would end up paying higher fees. This is something that needs to be carefully considered before making any decisions.

More difficult to access: It’s important to remember that once you consolidate your pensions, it may be more difficult to access them early if you need the money for an emergency. This is something that should be taken into account when making any decisions about pension consolidation.

Locate your pension funds

If you think you might have lost a pension pot from a previous job, you can use the government’s Pension Tracing Service at www.gov.uk/find-pension-contact-details.This enables people to locate money previously saved for retirement, that is unclaimed. So, it is worth checking if you could have pension funds that have not been claimed.

Finally, one thing you also need to bear in mind is that pension savings are big targets for fraudsters. If someone contacts you unexpectedly offering to help you transfer your pot, it’s likely to be a scam. If you’re concerned, contact the Financial Conduct Authority (FCA) to check they’re legitimate.

Source data:

[1] https://www.pensionspolicyinstitute.org.uk/media/2855/201810-bn110-lost-pensions-final.pdf

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.

Are you saving enough for retirement?

One in six over-55s have no pension savings yet.

Despite the fact that the government has been trying to encourage people to save for their retirement through initiatives such as auto-enrolment, there are still too many Britons who have no pension savings at all. Research reveals that a fifth (20%) of people still have no pension savings at all, and people nearing retirement aren’t doing much better[1].

Even prior to the cost-of-living crisis there have been a number of reasons why this might be the case. For some people, they simply may not be aware of the need to save for retirement. Others may not have enough spare income to put into a pension pot after covering their essential living costs.

More comfortable

However, the most common reason is people believe they will have plenty of time to start saving later on in life. But this is not the case. Even if you are in your 20s or 30s, it is never too early to start saving for retirement. The sooner you start, the more time your money will have to grow.

Findings also highlight the fact that one in six people (16%) who are within sight of their retirement still have no private pension savings, and consequently are missing out on the opportunity to make their life after work more comfortable.

Alarming number

At least 17% of people in the UK aged 55 and over admit to having no pension savings (other than the State Pension), which is only slightly better than the average for Britons as a whole – 21% of whom say they have no private pensions.

What this research shows is that an alarming number of people are effectively ‘sleepwalking’ towards their retirement without adequate preparations. But, there are signs that as people grow older, they are becoming aware that a lack of pension savings is a problem – though perhaps not quickly enough.

Pension deficit

The issue is most visible among adults aged under 35. Nearly a quarter (24%) of this group claim to have no pension savings at all, despite being a generation to benefit from auto-enrolment into workplace pensions. After 35 this drops to one in five, and then to one in six for the over-55s. Clearly, people do start to save more as retirement draws nearer, even if they have missed out on the opportunity to save over many years.

Lack of pension savings is a particular issue for those not in full-time employment. Encouragingly, just 8% of respondents who worked full time said they had nothing in their pension. But among part-time workers this figure was one in four (24%), indicating that part-timers face a potential pension deficit when they retire.

Worrying statistic

The people worst affected tend to be those not currently working at all – whether because they are unemployed or because they are full-time parents. Nearly 60% of this group said they had no pension savings. Where this is because of full-time parenthood, the parent in question may be relying solely on their partner’s pension in later life. This is a risky strategy, both because that pension may not be enough for both of them, and because of the risk of relationship break-up.

Another worrying statistic highlights that one in five people simply don’t know how much they have in their pension savings. Curiously, this uncertainty grows rather than shrinks as people get older: while 14% of under-35s are unsure, this rises to 22% between the ages of 35 and 54, and then to 24% among the over-55s.

Substantial income

It may be the case that many of those who think they have no pension savings are wrong, and that they do have pension pots from previous jobs (or even their current job) that they don’t know about. The first step for anyone who thinks they are pension-less is to contact the government’s Pension Tracing Service and search through their previous employers to see if they were ever a scheme member.

However, some people will reach the age of 55 (the earliest age that someone can access pension pots) and find that they genuinely have no pension savings. But this isn’t a reason to give up and assume it’s too late. Although a person close to retirement has a lower chance of saving enough to provide a substantial income, pensions can help your money to go a lot further.

Source data:

[1] Survey by Unbiased and Opinium of 2,000 non-retired UK adults, conducted June-July 2020.

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.

Cash may not be king

Deciding whether to withdraw cash from your pension pot.

Choosing what to do with your pension is a big decision. If you’ve been saving into a defined contribution pension (sometimes called ‘money purchase’) during your working life, from age 55 (age 57 in 2028) you need to decide what to do with the money you’ve saved towards your pension when you eventually decide to retire.

However, making the wrong decision could cost you heavily in the form of an unwanted tax bill, eventually running out of money in retirement and even a tax credits and benefits overpayment.

So before you do anything, there are things you should consider. Note: this article doesn’t cover pension schemes where the pension you’ll be getting is worked out as a proportion of your pay.

How much money do you need to retire?

Before you take any cash out of your pension, you need to calculate how much money you actually need. Do you need a lump sum of cash all at once? If so, what are the tax implications? Or would you be better off with a regular income stream?

Remember that retirement could be 30 to 40 years, or more. As well as what you’ll need to cover everyday living expenses, do you have any specific plans for your retirement, such as regular holidays or enjoying a hobby? Or are you thinking of any big one-off purchases or expenditure, like a new car or home improvements? Once you know how much money you need, you can start to look at your options.

What are the tax implications?

Taking cash out of your pension can have tax implications if you withdraw more than your tax-free element (typically 25% of your pension). You can leave the rest invested until you decide to make more withdrawals or set up a regular income.

However, you need to make sure you understand those implications before you make any decisions. Otherwise, you could end up with a significant tax bill that you weren’t expecting.

What are the fees?

When you retire and start taking money out of your pension, you may be charged fees by your pension provider. Some pension providers will charge a fee for each withdrawal you make, while others may charge a flat rate or percentage of your pension pot.

There may also be other charges, such as an administration fee. Taking money out of your pension will also reduce the amount of income you have in retirement, so it’s important to think carefully before you decide to take any money out of your pension pot.

How long will the money last?

Consider how long you’ll need the money to last. If you take a lump sum of cash, it’s likely that it won’t last as long as if you take an income. This is something to keep in mind when you’re making your decision.

What if you need more money later?

If you take cash out of your pension now, it may not be there if you need it later on in life. This is something to consider if you think you may need more money down the line. Even if you’ve seen the value of your pensions fall that doesn’t necessarily mean that you’ll have to delay your retirement altogether.

Could you take less from your pension savings until their value recovers, and use other savings instead to bridge the gap? And could you put off any big purchases you’d planned?

What are the risks?

Taking cash out of your pension comes with risks. There’s the risk that you could outlive your money, or that the value of your pension could go down. You need to make sure that you understand all of these risks before you make a decision.

Options for using your defined contribution pension in retirement

Keep your pension savings where they are – and take them later.

Use your pension pot to buy a guaranteed income for life or for a fixed term – also known as a ‘lifetime’ or ‘fixed term annuity’. The income is taxable, but you can choose to take up to 25% (sometimes more with certain plans) of your pot as a one-off tax-free lump sum at the start.

Use your pension pot to provide a flexible retirement income – also known as ‘pension drawdown’. You can take the amount you’re allowed to take as a tax-free lump sum (normally up to 25% of the pot), then use the rest to provide a regular taxable income.

Take a number of lump sums – usually the first 25% of each lump sum withdrawal from your pot will be tax-free. The rest will be taxed as income.

Take your pension pot in one go – usually the first 25% will be tax-free and the rest is taxable.

Mix your options – choose any combination of the above, using different parts of your pot or separate pots.

Understanding the different options

This is a very complicated topic and choosing what to do with your pension is one of the most important decisions you’ll ever make and will impact on your future standard of living in retirement.

Worryingly, over a third (35%) of pension holders do not know about the different options available to them for when the time comes to retire, according to research[1].

Source data:

[1] Online omnibus conducted by Opinium in June 2021 for LV – 4,000 representative UK adults surveyed nationally.

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.

TAX TREATMENT VARIES ACCORDING TO INDIVIDUAL CIRCUMSTANCES AND IS SUBJECT TO CHANGE.