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.

Create a better world to live and retire in

Pension investments to harness a more sustainable planet.

Few people are aware of what their workplace pension invests in, let alone how their pension provider incorporates environmental, social and governance (ESG) matters into the process.

Almost two-thirds (64%) of UK pension holders say that didn’t know their pension could be invested in ways to help fight climate change. One in six (17%) of UK pension holders currently invest their pension responsibly, but 41% say they would like their pension to be invested responsibly, new research has revealed[1].

Collective power

Over three quarters (77%) of UK adults class themselves as ‘climate conscious.’ Three out of five (59%) UK adults are familiar with the term ‘responsible investment,’ but only 26 per cent actually know what it means and understand its collective power to protect the planet. Men are more likely to be familiar with the term responsible investment than women (69% vs 50%).

More than half (56%) of pension holders said they would consider investing a portion of their pension responsibly. Around a quarter (23%) were willing for at least half their pension to be invested responsibly. With one in ten (11%) wanting between 90% and 100% of their pension invested responsibly.

Protecting the environment

With over half (57%) of 18-24-year-olds wanting their pension investments to harness a more sustainable planet, compared to just over a quarter (29%) of 65-year-olds and over, it’s clear there is still more that can be done to build a better understanding of inter-generational financial resilience for the future.

Pension holders were also asked what criteria they would like a responsibly invested pension to consider, with climate change and protecting the environment (42%) being highly rated. Social factors such as health and safety (29%) and use of plastic (28%) followed closely behind. The research also found more than half (53%) of pension holders do not know how their pension funds are invested.

Source data:

[1] Royal London commissioned survey by Opinium between 18th to 22nd October 2021 with a sample of 2,000 nationally representative UK adults.

Time to bring your pensions together?

3.6 million Britons have lost track of their pension savings.

The more old pensions you do have, the easier it is to end up losing one. Tracing pensions from years ago can be a hassle. Over 3.6 million Britons admit they have no idea how many pensions they have and risk paying more in fees than necessary, according to new research[1].

The number of workers with small pension pots of under £1,000 has surged dramatically in recent years, as auto enrolment has allowed millions of people to benefit from workplace pensions for the first time.

Paying fees to multiple providers

However, with the average employee now changing jobs 11 times[2] in their working life, people are increasingly building up many small pots and are often losing track, misplacing paperwork or forgetting about previous schemes they are invested in.

The Pensions Policy Institute (PPI) predicts the number of small pots will triple by 2035 to 27 million[3]. Although the Government’s Pension Dashboard will allow people to see all of their pensions in one place when it comes into effect in a few years’ time, it will not solve the problem of savers paying fees to multiple providers across all their pensions.

Consolidate small pension pots

While savers already have the option of combining their pensions, one in 10 (10%) have no idea how to do this, while 12% say it’s just too much hassle. As a result, more than two-fifths (44%) say they’ve never bothered to track down savings from a previous employer.

Almost three quarters (72%) of Britons now support the introduction of a new system that would automatically consolidate small pension pots as they move jobs, reinforcing strong support from the industry for the change. This would make it easier for people to manage and keep track of their retirement savings, while making the system more efficient and effective for the UK’s 33 million[4] pension holders.

Compare the features and benefits

Even if you have not had that many jobs, you may still have a number of different pensions to keep track of. Pensions can be confusing, but there is an alternative way to help keep on top of them. Pension consolidation may allow you to combine some or all of your defined contribution pensions in one place.

Consolidating your pension means fewer statements to keep an eye on, along with fewer and potentially lower management charges. However, not all pension types can or should be transferred. It’s important that you know and compare the features and benefits of the plan(s) you are thinking of transferring. It can be a complex decision to work out whether you would be better or worse off combining your pensions, so it’s essential to obtain professional financial advice.

Source data:

[1] The research was carried out online by Opinium across a total of 5,010 adults aged 18+. Data is weighted to be representative of the GB population. Fieldwork was carried out between 12th to 18th March 2021.

[2] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/945319/s mall-pots-working-group-report.pdf

[3] https://www.pensionspolicyinstitute.org.uk/media/3545/20200723-deferred-members-final-report-for-the- website.pdf

[4] Finder,Pension Statistics 2021

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.

Beyond profit

How green is your pension?

The consequences of inaction on climate change are now impossible to ignore. Every company has an impact on the world around us. And by investing in them, so do we.

From devastating wildfires ripping through several countries, the aftermath of Storm Ida that caused unimaginable flooding across the northeast of the US, storm Arwen that brought disruption to the UK in November and last August’s 7.2 magnitude hurricane in Haiti – are all examples of natural disasters due to climate change.

Increasingly more and more pension savers are asking where their funds are invested. Many people are no longer just concerned about getting the best returns, they also want their money to be used in a way that helps society and the planet.

Climate risks

A survey finds a third of pension schemes have already set targets to reduce their exposure to climate related risk[1]. 61% of schemes have considered setting a target to reduce their exposure to climate risks, but 4 in 10 schemes have yet to consider climate risk targets and 28% say they will not be setting a target.

Of the 33% of schemes that have set or are in the process of setting a target, half have included an emissions-based target with the majority (70%) of these being a ‘net zero’ target.

Pensions industry

UK pension schemes are a massive influence on the financial services industry including how the climate related risks and opportunities are identified, assessed and managed. This survey shows that the pensions industry is rising to the defining challenge of our age.

In another survey, two-thirds (67%) of consumers surveyed believe that it is important to consider Environmental, Social, and Corporate Governance (ESG) factors before investing and this figure rises to almost three in four (72%) for those respondents with a pension[2].

Responsible investing

ESG is an evaluation of a firm’s collective conscientiousness for social and environmental factors. Interestingly, females are more likely to consider ESG investing at 70.4% than males at 63.9% and its importance is broadly similar across all age cohorts.

Whilst 51% of those with pensions would like to increase their investment in companies that are tackling climate change, some 70% of those respondents acknowledged the need to better understand the benefits of responsible investing, highlighting the fact that there is an onus on the industry participants to educate consumers in this space.

Investment decision

More than half (53%) of those surveyed believe that it is important that a company has a positive record of social responsibility and good corporate governance, rising to 60% of those with a pension.

The survey also explored the factors that are important to consumers when considering investing sustainably. Most respondents (75%) indicated that they would need good financial advice before making their investment decision, rising to 78% for those with a pension.

Pension sustainably

Two-thirds (67%) said they would only invest their pension sustainably if the returns were the same or better, (71% of pension holders) and 64% said they would only consider doing so if they are not paying higher fees and charges (68% for pension holders.

Some 51% of those pension holders surveyed said they would like to increase their pension savings into companies helping to combat climate change and only 20% of all respondents (17% of those with a pension) said that investing sustainably is more important than investment returns.

Source data:

[1] The Association of Consulting Actuaries 2021 Pension trends survey was conducted in the summer of 2021 and attracted 212 responses from employers of all sizes, running over 400 different schemes

[2] Aviva Life & Pensions Ireland DAC (Aviva), research of the 1,200 people surveyed 20.08.21

Improve your financial life

Setting a financial New Year’s resolution you’ll actually keep.

Heading into the New Year, it’s the perfect time to take stock of your budget, liabilities and investments—and check them against your financial goals. The New Year brings an opportunity to reflect on the past year and to set new goals for the year ahead.

But before setting financial goals, it helps to understand your financial priorities, and understand your overall plan to achieve the financial life you want. Think about your financial plan, and what you are hoping to accomplish, not only this year, but in years to come. Think about what you can do this year to help reach your longer-term goals.

Secure your financial future

Whatever situation you find yourself in, it’s important to be realistic about your goals. We all have different financial goals and aspirations in life. Yet often, these goals can seem out of reach. In today’s complex financial environment and the challenges of the COVID-19 pandemic, achieving our financial goals may not be that straightforward. This is where financial planning is essential to help secure your financial future.

The benefits of setting financial goals all work together to boost your financial health. You’ll gain more confidence in your money management decisions and significantly decrease money-related stress. If you want to take control of your money and create more security, you need to set some financial goals.

Keep your goals realistic

A financial plan seeks to identify your financial goals, prioritise them, and then outline the exact steps that you need to take to achieve your goals. Figuring out your objectives and matching them with timelines are the keys to setting financial goals. Your financial goals are specific and unique to a number of factors related to you, like your age, your interests, current financial situation and your aspirations.

Based on these, you need to develop your goals and establish a plan to achieve them. Any goal (let alone financial) without a clear objective is nothing more than a pipe dream, and this couldn’t be more true when setting financial goals. However, it’s important to keep your goals realistic as it will help you stay the course and keep you motivated throughout your journey until you get to your destination.

Monetary value to that goal

You need to be crystal clear about why you are doing what you’re doing. This could be planning for your children’s education, your retirement, that dream holiday, or a property purchase.

Once the objective is clear, you need to put a monetary value to that goal and the time frame you want to achieve it by. The important point is to list all of your goal objectives, however small they may be, that you foresee in the future and put a value to them.

Short, medium and long-term

Now you need to plan for where you want to get to, which will likely involve looking at how much you need to save and invest to achieve your goals. The approach towards achieving every financial goal will not be the same, which is why you need to divide your goals in to short, medium and long-term time horizons.

As a rule of thumb, any financial goal which is due within a five-year period should be considered short-term. Medium-term goals are typically based on a five-year to ten-year time horizon, and over ten years, these goals are classed as long-term.

Developing a clear picture

This division of goals into short, medium and long-term will help in choosing the right savings and investments approach to help you achieve them, and it will also make them crystal clear. This will involve looking at what large purchases you expect to make such as purchasing property or renovating your home, as well as considering the later stages of your life and when you’ll eventually retire.

Creating and implementing a comprehensive financial plan will help you develop a clear picture of your current financial situation by reviewing your income, assets and liabilities. Other elements to consider will typically include putting in place a Will to protect your family, thinking about how your family will manage without your income should you fall ill or die prematurely, or creating a more efficient tax strategy.

Iterations as life changes

There is little point in setting goals and never returning to them. You should expect to make iterations as life changes. Set a formal yearly review at the very least to check you are on track to meeting your goals.

We will help you to monitor your plan, making adjustments as your goals, time frames or circumstances change. Discussing your goals with us is highly beneficial as we can provide an objective third-party view, as well as the expertise to help advise you with financial planning issues.

Finally, make sure your financial goals are SMART thinking about ‘SMART’ goals can help give direction to your financial aspirations and make those goals more achievable.

Specific –

Rather than pledging to ‘save money’ or ‘reduce debt’, thoroughly analysing finances and targeting specific areas for improvement could boost your chances of reaching your end goal.

Measurable –

Having benchmarks can help you track your progress, letting you make changes if you need to.

Attainable –

Setting a realistic goal can help keep your confidence up as you feel the achievement of getting close to your desired result.

Relevant –

Ensuring your goals are appropriate to what you are trying to achieve can help you avoid wasting time.

Time Sensitive –

If you know when you want to achieve your goal, this can allow you to pace savings and ensure you put the right amount of money aside.

Get ready to beat the ISA deadline

Time to give your financial future a boost?

Savers and investors have less than three months to use the £20,000 they can put into their tax-efficient Individual Savings Account (ISA) before the end of the financial year on April 5. The current tax year started on 6 April 2021 and ends on 5 April 2022.

ISAs enable you to minimise the amount of tax you pay on your hard-earned cash. Some ISAs give you instant access to your money and can be used to plan your finances for the short term. On the other hand, if you have longer term savings goals, you can invest in an ISA for your future.

Don’t lose your ISA allowance

There is a limit you can pay into ISAs each tax year and this is called your annual allowance. For the 2021/22 tax year, your annual allowance is £20,000 and you have until midnight on 5 April 2022 to use this allowance. If you don’t use your ISA allowance, you will lose it as it cannot be carried forward.

However, you will have a new annual allowance available from 6 April 2022 in the 2022/23 tax year, so if you have already put £20,000 into an ISA in the 2021/22 tax year, you could put another £20,000 away on or after 6 April 2022. You can only pay into one of each type of ISA in a tax year, within the annual allowance.

ISA OPTIONS:

Cash ISA

If you are a UK resident over the age of 18 (age 16 for a Cash ISA only), you can open one of each type in a tax year, providing you don’t exceed the annual allowance. Cash ISAs are suitable for your short-term savings goals as they don’t invest in the stock market but with current low interest rates, your savings won’t grow much, and you might not be keeping up with inflation. You might consider a Cash ISA as your ‘emergency’ pot of money for any unexpected expenses or a last-minute holiday.

Stocks & Shares ISA

This is a tax-efficient investment which allows you to invest your money in shares, government bonds (gilts) and property with peace of mind that you won’t pay any capital gains tax or income tax on the proceeds. This type of ISA is more suitable for your longer-term goals as they have the potential to out-perform Cash ISAs over the medium-long term, but with varying levels of risk.

The three main factors to consider when choosing between a Cash ISA and a Stocks & Shares ISA is the length of time you’ll be saving or investing, your appetite to investment risk and the impact of inflation over time.

Innovative Finance ISA

This is a type of investment account which allows you to lend your money through peer-to-peer lending platforms to receive tax-efficient interest and capital gains. You could be lending money to serve personal loans, small business loans or property loans or a combination of these.

Interest rates can often be much more attractive than Cash ISA rates, but peer-to-peer lending is a higher-risk form of investing and your capital is entirely at risk as there is no protection from the Financial Services Compensation Scheme (FSCS).

Lifetime ISA

If you are aged 18 to 39, and are looking to save for your first home or for later life, you could consider a Lifetime ISA. You can hold cash in a Lifetime ISA or choose to invest it just as you would with a Stocks & Shares ISA. You can put in up to £4,000 each year up to and including the day before your 50th birthday but remember that this £4,000 allowance contributes to your full annual ISA allowance.

The government will pay a 25% bonus on your contributions (£1 for every £4 you put in), up to a maximum of £1,000 a year but you must be aware that a charge of 25% will be applied to any withdrawal if it is for any reason other than buying your first home, at age 60 or if you are terminally ill.

Junior ISA

A Cash or Stocks & Shares ISA account, or both, can be opened for a child subject to the annual allowance which is £9,000 for the 2021/22 tax year.

The account must be opened by the child’s parent or guardian, but anyone can contribute once the account has been opened. Savings in a Junior ISA account cannot be withdrawn until the child reaches 18.

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.

New Year’s tax saving resolutions

Make full use of your relevant tax planning opportunities.

With the tax year end, 5 April on the horizon, taking action now may give you the opportunity to take advantage of any remaining reliefs, allowances and exemptions.

We have provided some key tax and financial planning tips to consider prior to the end of the tax year. Now is also an ideal opportunity to take a wider review of your circumstances and plan for the year ahead.

Check your PAYE tax code

It’s important to check your tax code. Your tax code is based on the amount of tax you should be paying and the amount you can earn before tax applies. The tax code is the identifier that tells your employer how much tax should be deducted from your salary each time you get paid. If you have multiple employers or pension providers, you may get more than one tax code. If you’re on the wrong one, you could be paying HM Revenue & Customs (HMRC) more than you ought to be. On the other hand, you risk getting penalised if you’re paying too little.

Transfer part of your personal allowance

Married couples and registered civil partners are permitted to share 10% of their personal allowance between them. The unused allowance of one partner can be used by the other, meaning an overall combined tax saving. The amount you can transfer is £1,260 for 2021/22 and a transfer is not permitted if the recipient partner pays tax at a rate higher than the basic rate of 20% (higher than the intermediate rate of 21% for Scottish taxpayers).

Contribute up to £9,000 into your child’s Junior ISA

The fund builds up free of tax on investment income and capital gains until your child reaches age 18, when the funds can either be withdrawn or rolled over into an adult ISA. Relatives and friends can also contribute to your child’s Junior ISA, as long as the £9,000 limit for 2021/22 is not breached.

Tax-free savings and dividend allowances

For 2021/22, savings income of up to £1,000 is exempt for basic rate taxpayers, with a £500 exemption for higher rate taxpayers. The tax-free dividend allowance is £2,000 for all taxpayers. Married couples and registered civil partners could save tax by ensuring that each person has enough of the right type of income to make use of these tax-free allowances.

Individual Savings Accounts (ISAs)

You can put the entire amount into a Cash ISA, a Stocks & Shares ISA, an Innovative Finance ISA, or any combination of the three. Usually when you invest, you have to pay tax on any income or capital gains you earn from your investments. But with an ISA, provided you stick to the rules on how much you can pay in, all capital gains and income made from your investments won’t be taxed. Every tax year you have an ISA allowance, which is currently £20,000 for the 2021-22 tax year.

Utilise any capital losses

If you realise capital gains and losses in the same tax year, the losses are offset against the gains before the capital gains tax exempt amount (£12,300 in 2021/22) is deducted. Capital losses will be wasted if gains would otherwise be covered by your exempt amount. Consider postponing a sale which will generate a loss until the following tax year, or alternatively realising more gains in the current year.

Maximise pension contributions

The annual allowance for 2021/22 is £40,000. To avoid an annual allowance tax charge, the pension contributions made by yourself, and by your employer on your behalf, must be covered by your available annual allowance. If you haven’t used all your allowance in the last three tax years, it might be possible to pay more into your pension plan by ‘carrying forward’ whatever allowance is left to make the most of the tax relief on offer, though bear in mind the amount is still capped at 100% of your earnings. However, different rules apply if you’ve already started to take money out of your pension plan and you’re affected by the Money Purchase Annual Allowance, or if your income when added to your employer’s payments are more than £240,000.

Pay pension contributions to save NICs

If you pay pension contributions out of your salary, both you and your employer have to pay National Insurance Contributions (NICs) on that salary. When your employer pays a contribution directly into your pension scheme, the employer receives tax relief for the contribution and there are no NICs to pay – a saving for both you and your employer. You could arrange with your employer to cover the cost of the contributions by foregoing part of your salary or bonus. You must agree in writing to adjust your salary before the revised pension contributions are paid for this arrangement to be tax-effective, although pension contributions are not caught by the clampdown on salary sacrifice arrangements.

Make a Will and review it

If you die without making a Will, your assets will be divided between your relatives according to the intestacy rules. Your surviving spouse or registered civil partner may only receive a portion of your estate, and Inheritance Tax will be due at 40% on anything else above £325,000 (up to £500,000 if the Residence Nil Rate Band is available).

Leave some of your estate to charity

Where you leave at least 10% of your net estate to charities, the Inheritance Tax on the remainder is charged at 36% instead of 40%. The exact calculation of your net estate is quite complicated, so its important to receive professional advice when drawing up or amending your Will.

Make regular IHT-free gifts

As long as you establish a pattern of gifts that can be shown to be covered by your net income, without reducing either your capital assets or your normal standard of living, these gifts will be free of Inheritance Tax. The recipients of the gifts need not be the same people each year.

Use the IHT marriage exemption

If your son or daughter is about to marry, you and your spouse can each give them £5,000 in consideration of the marriage, and the gift will be free of Inheritance Tax. The marriage exemption can also be combined with your £3,000 a year Inheritance Tax exemption to allow you to make larger exempt gifts. You can make an Inheritance Tax-free gift of £2,500 for a grandchild’s wedding. Registered civil partnerships attract the same exemptions.

Make IHT-free gifts each tax year

These gifts are free of Inheritance Tax and, if you forget to make your £3,000 gift one year, you can catch up in the next tax year by giving a total of £6,000 but you can only carry forward the £3,000 allowance for one tax year. Remember, you and your spouse or registered civil partner can each give £3,000 out of your capital every tax year in addition to gifts you make out of your regular income.

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.

Generation vexed

A third of Gen Xers not confident they can fund their retirement.

With 57% of Gen Xers wanting to save more for retirement but struggling to do so, a quarter (25%) plan to work part-time past the State Pension Age (SPA) to plug an expected income shortfall in retirement, while 17% plan to work full-time. However, they have serious concerns about whether they will be able to continue working later in life.

The findings, which are contained in a report from the International Longevity Centre (ILC) show why many people in Generation X continue to be ‘Generation Vexed’.

As many as 37% of all Gen Xers plan to work later in life to boost their retirement income, while for 25% this is their only plan.

However, they have several concerns they fear will constrain their ability to do this:

59% are worried poor physical health will restrict their ability to work.
31% are concerned poor mental health will impact them.
31% fear age discrimination will restrict their ability to retain or find another job.

Other concerns include not having the right skills to adapt to the changing job market (19%) and a fear that the economic impact of the pandemic will make it harder to remain in work (17%)

These concerns are perhaps understandable, especially as 36% of all Gen Xers, and one in three (33%) of those whose only plan for retirement is to work longer, also have a health problem or a disability.

Meanwhile, almost two-thirds (62%) of those who plan to work past the SPA to address an income shortfall in retirement are confident they’ll be able to do so – but they may find this is not always possible as a quarter (25%) of this group currently have a health problem or disability, and some 7% expect to provide care to an adult in the next five years.

Source data:

[1] All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 6,035 adults aged 40-55. Fieldwork was undertaken between 13 – 24 November 2020. The survey was carried out online. The figures have been weighted and are representative of all UK adults aged 40-55. Calculations based on survey stats calculated by ILC. All references and methods are available in the full report, which can be downloaded here: https://ilcuk.org.uk/slipping-between-the-cracks/

Planning for early retirement

What are the financial consequences to stopping work in your 50s?

Early retirement may be the ultimate dream for some, but the coronavirus (COVID-19) pandemic made it the only option for many. Figures from the Office for National Statistics show that over-50s had the highest redundancy rate between December 2020 and February 2021[1].

Retiring early can give you that change of lifestyle you’ve been craving, open doors to new experiences and potentially improve your health. But there are financial consequences to stopping work in your 50s.

What is the financial impact of early retirement?

Traditionally, people retired between the ages of 60 and 65, but there’s no set age that you need to give up work. In fact, anyone with a pension pot can access it from age 55 – although this is set to rise to age 57 from 2028.

Retiring early requires some careful planning. It can put significant pressure on your funds as your new income is likely to be less than your pre-retirement earnings. You might have various sources of income for your retirement ranging from your personal and/or workplace pension, the State Pension, investments and other savings. Reviewing your financial situation and determining how much money you need to live a comfortable life in retirement is an important first step.

Something to bear in mind: if you’re aged over 55, your State Pension won’t be paid until you reach age 67. If you stop working before then, you could be relying on income from your private pension savings for more than a decade.

It’s also worth bearing in mind the impact of inflation. Prices have steadily increased over the past decade, for example, holidays, luxury goods and even basic necessities have become more expensive. So if you’re looking at a retirement of 25 years or more, you could see the purchasing power of your pension income decrease due to rising prices.

How to assess your financial situation

Understanding your individual financial situation can make a big difference when it comes to making decisions around your retirement savings. Fully assessing your personal finances can help give you a clearer picture of whether early retirement is feasible.

Here’s a checklist of what you should consider:

1. How do you plan for a varied retirement?

If you’re planning to retire early, think about what type of lifestyle you want to enjoy in later life. This will then help you determine what you’re saving towards. You might plan to travel, embark on a journey of further education or simply spend more time with loved ones – whatever you decide to do, you’re going to have demands on your retirement income.

When you’re reviewing your financial plans, it could be worth looking at those first early years of retirement as something separate. For example, including more in the budget for multiple holidays a year, or dinners out and trips to the theatre. Then take a look at how your lifestyle may modify as you slow down in later life. There may be fewer trips and holidays to take, but there could be increased care costs.

Taking early retirement means that you almost have to plan for two different retirements. One that caters to the immediate future, where you’re likely to still be very active. And one where a slower pace of life comes into play. Each will have a different focus and therefore different demands on your money.

2. How many years do you expect to be retired?

There are obviously no guarantees on how long any of us will live, but when it comes to retirement planning, you’ll need to make an informed guess.

It’s worth considering family history, as well as factors such as your gender and geographical region. If you expect to live to around 85, but plan to retire at 55, you’ll need to save enough to support yourself for 30 years – but don’t forget, you may live a lot longer than you expect, and you’re likely to want leave something for your loved ones.

3. How much will your State Pension be?

In order to understand your income requirements in later life, you’ll need to know when you can collect your State Pension and how much it’s likely to be.

The State Pension age is under review and is gradually being pushed back so it’s in line with life expectancy. Other factors, such as your gender and the year you were born, make State Pension ages vary. You can check your State Pension age here.

Currently, the maximum State Pension is £179.60 per week, or £9,350 a year[2]. However, you’ll need to have made, or be credited with, 35 years of National Insurance contributions to qualify for the full amount[3].

4. How much do you have in your private pension pot?

As the State Pension is not really enough to live on, the likelihood is that workplace or private pensions will make up a significant part of your retirement income.

When you retire, you can use some or all of your pension savings to buy an annuity, which then pays you a regular retirement income for either a set period, or for life. Alternatively, you can keep your savings in your pension pot and ‘drawdown’ only what you need, as and when you need it. You must have a defined contribution pension to be able to do this (your workplace pension provider will be able to inform you on whether you do).

The first step, before making a decision, would be to track down all of your pension pots and ask for a pension forecast. Estimate how much you can achieve via a drawdown, an annuity, or a combination of both. And remember, the value of any investments can fall as well as rise and isn’t guaranteed.

5. How can you ensure your pension pot will last?

Having an understanding of your retirement income and outgoings can help you to plan for the future. Perhaps you’ve reviewed your finances and realised you can retire early, or you might decide to wait a few more years to help you boost your pension pot that bit more.

The key thing to understand is that your retirement is completely personal, and the amount you will need will depend on your specific circumstances and expectations. If you’re in any doubt about the financial impact of early retirement, you should obtain professional financial advice.

Source data:

[1] Living longer: older workers during the coronavirus (COVID-19) pandemic. Data source, Office for National Statistics, May 2021.
[2] Having more for retirement. Data source, GOV.UK, August 2021.
[3] The new State Pension. Data source, GOV.UK, August 2021.

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 power of a plan

How to create a personal financial plan in 8 steps.

When thinking about your future financial wellbeing, it can be helpful to consider a plan. It is a good idea to have a clear sense of what you want from life and use this as a guide for making important decisions.

A comprehensive financial plan helps you achieve your goals by analysing your current situation, planning for the future and providing continuous monitoring of progress towards those goals. A well-thought-out plan can help you protect yourself from unexpected events that could affect your ability to meet long-term financial commitments.

What do you want to do in life? Who are the people who matter most to you? What do you worry about at night?

Step 1: Set your goals

Without them, it’s hard to know what direction you’re headed and even harder to remember where you came from. Critical goals come before needs and wants.
When life changes – and it always does – your goals help guide your financial decisions and focus on what’s important.

Step 2: Make a budget

So you’ve decided to start keeping track of your income and expenditure, but how do you know where to begin? Creating a budget can seem like a daunting task, especially if you are not familiar with the process.

Not only is it important to know how much money is coming in and going out of your household each month, it’s also vital that you understand where that money is being spent. With a budget, you can align what you make with what you spend. With goals set, you can now organise your money.

Step 3: Build your emergency savings

The best way to ensure you have money available in an emergency is to build your own savings, typically three to six months’ worth of living expenses. Emergency funds should be set aside in case of an unexpected financial disaster. Taking the time to save for emergencies is a must, even if you already have a budget in place.

In fact, when creating your budget, it’s important to remember that there will be some things that don’t fit into your monthly spending plan, and emergency savings make a great way to cover these unexpected costs.

Step 4: Protect your income

Falling ill or having an accident doesn’t have to become a financial burden on you or your family. What if you or your partner got too sick or hurt to work? Or passed away unexpectedly? Could those who depend on you still pay the bills – and save for the future? Planning your financial future isn’t only about savings and investments.

Of equal importance is putting protection in place for you and your family for when you die or if you become ill. Most people have heard of life insurance, but may not know about the different types or about the options for people affected by ill health. No one likes to think of these things. But life can change in an instant. It’s good to hope for the best, but be ready for the unexpected. Insurance helps you do that.

Step 5: Pay down debt

The importance of paying down personal debt cannot be understated. But it can be difficult to prioritise paying down debt while still paying for essential day-to-day living expenses. However, ignoring the significance of personal debt could lead you to major financial trouble in the long run.
Paying off your debts will not only free up cash flow to allow you to save, it will also go towards improving your credit score. The lower your debt-to-income ratio is, the better your credit rating. Your credit rating affects the interest rates that lenders charge you for mortgages, car loans and other types of financing.

Step 6: Save and plan for retirement

Everyone needs to save and plan for retirement. No matter how much you make or whether you have a job, you should always start saving as early as possible. It is important for you to take control of your retirement planning and make decisions regarding your pension. It is often not appreciated that contributing to a pension arrangement can help you build up an extremely valuable asset.

People are living longer and leading more active lives in retirement. As a result, it is more important than ever for you to think about where your income will come from when you retire. Pension saving is one of the few areas where you can still get tax relief.

Step 7: Invest some of your savings

Saving and investing are important parts of a sound financial plan. Whereas saving provides a safety net for unexpected expenses, investing is a strategy for building wealth. Once you have an emergency savings fund of three to six months’ worth of living expenses, you can develop a strategy to grow your wealth through investing.

Investing gives your money the potential to grow faster than it could in a savings account. If you have a long time until you need to meet your goal, your returns will compound. Basically, this means in addition to a higher rate of return on investments, your investment earnings will also earn money over time.

Step 8: Make your final plans

The importance of estate planning is necessary for all individuals, not just the wealthy. Without proper estate planning in place to protect your assets, you could end up leaving large amounts of money to be fought over by your loved ones and a large Inheritance Tax bill.

Your estate planning should sit alongside making your Will, both key parts of putting your affairs in order later in life. Working out the best ways to leave money in a Will before you pass away can help to make the lives of your loved ones easier when you’re no longer around.

DISCLAIMER