Pension consolidation

Simplifying and maximising retirement benefits

The employment landscape has evolved significantly over the last few decades, and changing jobs multiple times before retirement is now very much the norm. As a result, many people have multiple pensions set up, as they have been automatically enrolled into a new pension scheme each time they have started a new job.

When you have several pension pots, things can become complicated. If you have accumulated a number of pension pots over the years from different employers, consolidating them could be a sensible move.

Bringing together all your different pension pots

You may have pensions that were set up a long time ago and are no longer suitable for your requirements, or you could be over-paying for services such as life insurance that are not required. Monitoring the performance of multiple pensions is also time-consuming. Bringing together all your different pension pots can give you more control over your money and provide a much clearer picture of your overall pension savings.

Consolidating your pension pots enables you to bring together all your different pensions and makes it easier to manage your money. Less time will be needed to monitor each different pension and check performance, and there is likely to be considerably less paperwork once your pensions are combined. You are also likely to get a better understanding of whether your retirement planning strategy is on track.

Easier to determine your overall asset allocation

Crucially, having all your pension savings in one place should also make it far easier to determine your overall asset allocation. If your pension savings are spread out over many different providers, it can be hard to keep track of your exact asset mix and know how much risk you are taking on. If you have a plan that was set up a long time ago, you may not even know what investments you currently hold.

Additionally, consolidating your pensions can give you the opportunity to lower costs if you switch to a more cost-effective pension provider, or boost your investment options if you transfer to a more flexible provider.

A pension consolidation could be the appropriate action to take if:

• You have a number of pension pots and want more control over your money
• You have a number of pension pots and want less hassle
• You are unhappy with the performance of a current provider
• You are unhappy with the choice of investments offered by a current provider
• You are paying high fees with a current provider

However, a pension consolidation is not always the best option. It may not be sensible to consolidate your pensions if:

• You are a member of a defined benefit pension scheme. If you transfer out of this type of pension, you’ll be giving up guaranteed benefits and potentially taking on greater risks
• You have a pension that comes with valuable benefits. For example, a pension may allow you to buy a higher income in the future via a ‘Guaranteed Annuity Rate’
• You have a pension provider that charges high fees to transfer to another provider

Before doing anything, check what you have

Do you know how many pensions you have and what they offer? Do they, for example, have particular death benefits or financial guarantees, and do they let you take your pension money how and when you want? We can ascertain what benefits and guarantees there are that you would not want to give up and ask your pension providers for up-to-date information.

Combining pensions isn’t right for everyone. If you have any pension pots worth more than £30,000, you may have to take financial advice – and it’s such an important decision that you may want to take advice even if the amount is less.

Make your own decisions about your pension savings

There are a number of ways that pension pots can be consolidated. For example, one strategy is to pick one of your pension pots and transfer the other pensions to this pot. This could make sense if you are happy with the services offered by one provider in particular.

Alternatively, you could bring all your pensions together into a Self-Invested Personal Pension (SIPP) – a government-approved personal pension scheme which allows you to make your own decisions about how your pension savings are invested.

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.

TAX RULES ARE COMPLICATED, SO YOU SHOULD ALWAYS OBTAIN PROFESSIONAL ADVICE.

A PENSION IS A LONG-TERM INVESTMENT.

THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.

Preserving your legacy

How to keep your wealth in the family

Are you worried about leaving an inheritance to your loved ones and then having them pay tax on your legacy? No one likes to think about a time when they won’t be here, but unfortunately the reality is that some people aren’t prepared financially.

Estates that pass on to a spouse, registered civil partner or charities are exempt from Inheritance Tax (IHT), even if the value of such estates is higher than the threshold limits. Estates that pass on to anyone else, including siblings, children and grandchildren, attract IHT.

Deciding on the best way to leave your estate

If your estate is likely to suffer IHT, there are accessible solutions and strategies we can discuss with you to mitigate this tax. You may find the idea of discussing inheritance uncomfortable, but proper IHT planning could save your family hundreds of thousands of pounds. This is about deciding on the best way to leave your estate to those you love after you die, and to help ensure your loved ones are provided for.

When you die, the Government charges tax on your estate – and it could be a pretty significant amount. IHT is payable at 40% on assets within your estate that exceed the nil-rate band threshold (currently at £325,000) and is payable on assets that are passed on when you die. Nearly everyone has an estate, no matter how big or small it may be. This will include your property and business, cash and investments, cars, jewellery, art, and proceeds from life insurance policies not written in an appropriate trust.

Transfer to a surviving spouse or registered civil partner

An additional nil-rate band is available for individuals on their main residence if it is passed on to a direct descendant. Direct descendants include children (including stepchildren, adopted children or foster children) or grandchildren. This additional IHT-free residence nil-rate band is set at £150,000 in the 2019/20 tax year and will increase to £175,000 from 6 April 2020. As with the existing nil-rate band, any unused additional nil-rate band can be transferred to a surviving spouse or registered civil partner.

The residence nil-rate band is available on top of the existing IHT nil-rate band of £325,000, so that in 2020/21 an individual will potentially be able to leave £500,000 free of IHT. As is now the case with the standard nil-rate band, where the first of a married couple to die leaves their estate to their spouse, the residence nil-rate band can effectively be ‘passed on’ to the surviving spouse.

More tax-efficient for IHT purposes to gift money

While few of us enjoy talking about our eventual demise, not having a Will can result in assets passing to the wrong person or in a way that gives rise to a larger IHT bill. That’s why it’s equally important to keep any Will up to date. Tax rules and rates are always changing, and it is crucial to make the most of any new opportunities and to avoid any pitfalls. However, it can be more tax-efficient for IHT purposes to gift money while you are still alive.

Transformative effect on both your and your family’s life

Transferring wealth while you are alive can have a transformative effect on both your and your family’s life. Gifting money to a younger relative to top up their pension and an Individual Savings Account can substantially boost their income when they eventually retire.

Each year, you can give away £3,000, and that gift will not be subject to IHT. You can also give £250 to any number of people each year. Parents can give £5,000 to each of their children as a wedding gift. Grandparents can give £2,500, and anyone else £1,000.

Further tax-free gifts

Gifts of any size to charities or political parties are also IHT-free. If a gift is regular, comes out of your income and does not affect your standard of living, any amount of money can be given away and ignored for IHT.

It is also possible to make further tax-free gifts (‘potentially exempt transfers’), but you have to survive for seven years after making the gift to get the full benefit of it being outside your estate for IHT purposes.

Taking a significant amount of wealth out of your estate

If you pass away within seven years and the gifts are valued at more than the nil-rate band, taper relief will be applied. The tax reduces on a sliding scale if the gift was made between three and seven years earlier.

Many people think that IHT only concerns the very wealthy, but property prices are such that the value of your property alone can easily exceed the tax threshold. Don’t forget, IHT can take a significant amount of wealth out of your estate, making a big difference to the amount your heirs receive when you are gone.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS.

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

THE RULES AROUND INHERITANCE TAX ARE COMPLICATED, SO YOU SHOULD ALWAYS OBTAIN PROFESSIONAL ADVICE.

THE VALUE OF INVESTMENTS AND THE INCOME THEY PRODUCE CAN FALL AS WELL AS RISE. YOU MAY GET BACK LESS THAN YOU INVESTED.

Planning for tomorrow

Will my retirement income be enough to live on comfortably?

The questions our clients almost always ask us are: ‘Will I be able to retire when I want to? Will I run out of money? How can I guarantee the kind of retirement I want?’

Worryingly, it’s been well documented that many Britons aren’t saving enough in their pension for their retirement. Figures published by HM Revenue & Customs (HMRC)[1] in September 2019 show that the annual average contributions that every individual makes decreased in 2017/18 compared to 2016/17.

Saving enough money for retirement

It’s never too early to start planning for your future. When planning for retirement, the truth is that the earlier you start saving and investing, the better off you’ll be, thanks to the power of your money compounding over time. It’s like a snowball: the further up the mountain it rolls down from, the more snow it picks up, and the bigger the snowball is by the time it reaches the bottom. Put simply, this is what happens to your money.

However, given the difficulty of precisely timing market peaks and troughs, market downturns can have an impact on the value of your retirement pot which is directly dependent on the value of the investments your pension fund owns.

A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.

There are steps that you can take to improve your pension prospects, no matter what your age.

We can help you determine which retirement income methods may be best for you based on your personal needs and goals. These are some basics you need to know.

State Pension

The State Pension is a weekly payment from the Government that you can receive once you reach State Pension age. In order to qualify for the State Pension, you need to make National Insurance contributions. If you reached State Pension age before April 2016, you’ll be receiving the basic State Pension, plus any additional State Pension you may have built up. Those who hit State Pension age after April 2016 will receive the new single-tier State Pension.

Both the basic and single-tier State Pension are protected by something called the ‘triple-lock’ guarantee. This means that they rise each year by the greater of annual CPI inflation (announced in September every year), average earnings growth, or 2.5%.

From April 2019, the State Pension increased by average earnings growth, which came in highest at 2.6%. If you’re entitled to the full new single-tier State Pension, your weekly payments in the current tax year are £168.60 a week – for this, you’ll need to have 35 years of NI contributions.

The State Pension is unlikely to provide a substantial income in retirement. That’s where a private pension can make a big difference.

Pension tax relief

The Government encourages you to save for your retirement by giving you tax relief on pension contributions. Tax relief has the effect of reducing your tax bill and/or increasing your pension fund. However, at the time of writing this article, the way pension tax relief works is reportedly under review by the Treasury.

You can receive tax relief on private pension contributions worth up to 100% of your annual earnings. Since the tax relief you receive on your pension contributions is paid at the highest rate of Income Tax you pay, the higher your rate of tax, the more you could receive.

The Welsh Government now has the power to set Income Tax rates and bands from 6 April 2019, but has opted to keep these the same as England and Northern Ireland for tax year 2019/20.

England/Wales/Northern Ireland

Basic-rate taxpayers receive 20% pension tax relief, for example, a contribution of £100 from your salary into your pension would cost you £80, with the Government contributing the other £20 – the amount it would have taxed from £100 of your salary
Higher-rate taxpayers can claim 40% pension tax relief, for example, a contribution of £100 costs you £60, with the Government adding £40
Additional-rate taxpayers can claim 45% pension tax relief, for example, a contribution of £100 costs you £55, with the Government adding £45

Scotland

Starter-rate taxpayers pay 19% Income Tax but get 20% pension tax relief
Basic-rate taxpayers pay 20% Income Tax and get 20% pension tax relief
Intermediate-rate taxpayers pay 21% Income Tax and can claim 21% pension tax relief
Higher-rate taxpayers pay 41% Income Tax and can claim 41% pension tax relief
Top-rate taxpayers pay 46% Income Tax and can claim 46% pension tax relief

Annual allowance

Anyone earning less than £40,000 would only be able to obtain tax relief on a grossed up pension contribution equal to their gross income. Nobody actually pays tax on their pension contributions as such.

Contributions are made by people net of basic-rate tax, and the product provider grosses it up by adding a further £20 to every £80 that the individual pays. If this process results in the individual receiving more tax relief than they are entitled to, HMRC will claw it back further down the line.

Your annual allowance applies to all of your pensions if you have more than one. This includes the total amount paid into a defined contribution scheme in a tax year by you or anyone else (for example, your employer) and any increase in a defined benefit scheme in a tax year.

If you use all of your annual allowance for the current tax year, you might be able to carry over any annual allowance you did not use from the previous three tax years.

Your annual allowance will be lower if you flexibly access your pension. By accessing the taxable element of your pension, it triggers the ‘money purchase annual allowance’ (MPAA) rather than the tax-free cash pension commencement lump sum (PCLS). An individual could take their tax-fee cash from a pension arrangement and not trigger the MPAA.

For example, this could include taking cash or a short-term annuity from a flexi-access drawdown fund or taking cash from a pension pot (‘uncrystallised funds pension lump sums’).

The MPAA is £4,000 and is triggered by flexibly accessing benefits. If you have a high income, you’ll have a reduced (‘tapered’) annual allowance if both your ‘threshold income’ is over £110,000, or your ‘adjusted income’ is over £150,000.

If you go over your annual allowance, either you or your pension provider must pay the tax. HMRC does not tax anyone for going over their annual allowance in a tax year if they retired and took all their pension pots because of serious ill health or have died.

HMRC[1] figures published in September 2019 show that during 2017/18, 26,550 taxpayers reported pension contributions exceeding their annual allowance through self-assessment. 2016/17 was the first year affected by the tapered annual allowance; the total value of contributions reported as exceeding the annual allowance was £812 million in 2017/18.

Lifetime allowance

You usually pay tax if your pension pots are worth more than the lifetime allowance. This is currently £1,055,000. You might be able to protect your pension pot from reductions to the lifetime allowance. If you’re in more than one pension scheme, you must add up what you’ve used in all pension schemes you belong to.

A statement from your pension provider will tell you how much tax you owe if you go above your lifetime allowance, and your pension provider will deduct the tax before you start receiving your pension.

If you die before taking your pension, HMRC will bill the person who inherits your pension for the tax. The rate of tax you pay on pension savings above your lifetime allowance depends on how the money is paid to you – the rate is 55% if you receive it as a lump sum and 25% if you receive it in any other way (for example, through pension payments or cash withdrawals).

In April 2016, the lifetime allowance was reduced. You can apply to protect your lifetime allowance from this reduction. Tell your pension provider the type of protection and the protection reference number when you decide to take money from your pension pot. You can also inform HMRC in writing if you think you might have lost your protection.

You may also have a reduced lifetime allowance if you have the right to take your pension before the age of 50 under a pension scheme you joined before 2006.

In 2017/18, there were 4,550 counts of lifetime allowance excess charges paid. The total value of lifetime allowance charges paid by schemes in the tax year was £185 million – a 28.5% increase from £144 million in 2016/17 – according to HMRC[1] figures published in September 2019.

Source data:
[1] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/836637/Personal_Pensions_and_Pensions_Relief_Statistics.pdf

ACCESSING PENSION BENEFITS EARLY MAY IMPACT ON LEVELS OF RETIREMENT INCOME AND YOUR ENTITLEMENT TO CERTAIN MEANS TESTED BENEFITS AND IS NOT SUITABLE FOR EVERYONE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.

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.

TAX RULES ARE COMPLICATED, SO YOU SHOULD ALWAYS OBTAIN PROFESSIONAL ADVICE.

THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND UPON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATION.

Retirement savings longevity

Are you facing a pensions challenge?

We all want to ensure we have sufficient funds when we retire so we can spend our time the way that we want to. But how realistic are your current retirement plans?

Our average life expectancy will soon exceed 90 years for the first time ever, according to an international study[1] that suggests people will be living far longer in 2030, with the gap between men and women starting to close. This then raises the very important question: who will live longer, you or your pension?

These improvements in life expectancy reflect the advances in medicine and public health, as well as rising standards of living, better education, improved nutrition and changes in lifestyle. This will mean that as time goes by, you will need to reconsider your financial plans to keep everything on track.

Having enough to see you through your later years

There is no commonly accepted definition of when old age begins. For some, the cut-off for when old age starts is 65 years, but this is somewhat arbitrary and is often simply associated with the age one can begin to receive a pension and other benefits. But how will living longer affect your retirement plans? Will you have enough to see you through your later years?

This is particularly concerning in this day and age, because increased longevity means higher retirement savings will be necessary to avoid running out of money. Much will be dependent on how much monthly income you draw from your pension pot and if you take any lump sum payments.

Maintaining your standard of living in retirement

Retirement could last for 30 years or more depending on when you retire and how long you live. Your income in retirement is likely to come from several sources including your State Pension, any other pensions you’ve built up while working, and any savings and investments you have.

Prices tend to rise over time, so if you want to maintain your standard of living, you’ll need your retirement income to keep pace with inflation. The State Pension increases by at least the rate of inflation each year, and if you receive a retirement income from a past employer, this often rises by the rate of inflation or a set amount each year.

Enough money to live on for the whole of your retirement

If you’ll need to rely on your savings and investments to boost your income, you’ll probably also need to increase the amount you take from these over the years if you want your income to go as far as it used to. But if you take more income than your savings and investments earn each year, you will gradually reduce your capital.

The longer this goes on, the less savings you’ll have and the greater the risk of these running out. So before you give up work, you need to make sure these will provide you with enough money to live on for the whole of your retirement.

Source data:
[1] www.thelancet.com/journals/lancet/article/PIIS0140-6736%2816%2932381-9/fulltext
ACCESSING PENSION BENEFITS EARLY MAY IMPACT ON LEVELS OF RETIREMENT INCOME AND YOUR ENTITLEMENT TO CERTAIN MEANS TESTED BENEFITS AND IS NOT SUITABLE FOR EVERYONE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.

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.

TAX RULES ARE COMPLICATED, SO YOU SHOULD ALWAYS OBTAIN PROFESSIONAL ADVICE.

A PENSION IS A LONG-TERM INVESTMENT.

THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

Focus on long-term horizons

Time in the market, not timing the market

During this difficult time, fear and worry are understandable, particularly as the coronavirus (COVID-19) outbreak led to the biggest daily drop in the FTSE 100 since the financial crisis of 1987. Trying to second-guess the impact of events such as the coronavirus or the recent stock market volatility – or even attempting to make a bet on them – rarely pays off. Instead, investors who focus on long-term horizons – at least five to ten years – have historically fared much better.

We all have different objectives in life and need different strategies to help achieve them. Sensible diversification – owning a mix of assets, including shares, bonds and alternative investments such as property – can help protect investors over the long term. When one area of a portfolio underperforms, another part should provide important protection.

Risk tolerance and time horizon

If you have a well-diversified portfolio, then it’s more important than ever to stay the course. You have a strategy in place that reflects your risk tolerance and time horizon, so remain committed. This will help you navigate through periods of uncertainty when some investors are panicking or acting out of fear. Volatility is not all bad, as long as you are prepared to take advantage of the unique opportunities it brings.

In volatile markets, it is perfectly normal for investors to become nervous, question their investment approach and concentrate on the potential for short-term losses over their longer-term investment strategy. Be aware of the psychological effect this type of volatility has on you as an investor, and resist the urge to be reactive.

Proper diversification and perseverance

It’s important to understand that this movement is not all bad for investors. Some commentators may talk about volatility as a detriment to markets and investors, but fail to discuss the opportunities that arise for investors during periods of market volatility.

No one knows how severe any market turbulence will be or what the markets will do next. It could be over quickly or become more protracted. However, no matter what lies ahead, proper diversification and perseverance over the long term are very important.

Ups and downs of different types of market conditions

It’s likely that the coronavirus will continue to have an impact on markets over the coming months and even years. However, major events causing markets to fall, particularly in the short term, is something we’ve seen time and time again. And it doesn’t mean that markets won’t recover. History shows again and again that the ups and downs of different types of market conditions are part and parcel of investing.

The key is to remain calm when stock markets fall. Don’t panic. Don’t frantically sell. If you can avoid it, don’t even log into your investment account. At moments like this, the skills and experience of professional financial advisers come into their own. Not only do we have the experience of dealing with different types of market conditions, but we can also help to take the emotion out of your decisions.

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.

Beware of pension fraudsters

Safeguard your hard-earned retirement savings from COVID-19 scammers

Fraudsters are exploiting fears over the COVID-19 pandemic to target pension savers and investors. The Pensions Regulator, the Financial Conduct Authority (FCA) and the Money and Pensions Service have issued a joint statement urging people not to make rash pension decisions in the wake of the global pandemic, as criminals try to exploit public fears over the market turmoil to dupe victims out of their cash.

Persuading you to transfer your pension pot

Scammers will make false claims to gain your trust – for example, claiming they are authorised by the FCA or that they don’t have to be FCA-authorised because they aren’t providing the advice themselves, or claiming to be acting on the behalf of the FCA or the government service Pension Wise.

Scammers also design attractive offers to persuade you to transfer your pension pot to them (or to release funds from it). It is then often invested in unusual and high-risk investments like overseas property, renewable energy bonds, forestry, storage units; or, invested in more conventional products but within an unnecessarily complex structure which hides multiple fees and high charges; or stolen outright.

Fraudsters look to exploit people’s anxieties and fears

Attempts to scam personal data and monies are likely to increase during the COVID-19 pandemic and economic downturn as fraudsters look to exploit people’s anxieties and fears. You need to be aware of receiving emails, calls or texts from criminals impersonating investment companies, insurers, pensions providers and other organisations to trick you into providing personal or financial information or money.

Cold calls about your pension – it is illegal for firms to contact you out of the blue about your pension, and you should hang up. The caller may offer to help you access your pension before age 55, or offer you a ‘free pensions review’.
Phishing emails – these attempt to trick people into opening malicious attachments or reveal personal or financial information.
Ghost brokers – fraudsters may attempt to use an insurer’s branding to promote and sell fake or invalid pension or investment products which may claim to offer COVID-19 protection.

What should I look out for?

Be suspicious of offers that seem too good to be true

Do not feel pressured or agree to offers or deals on insurance, pensions or investments

Check the credentials of the person you are dealing with by getting a name and contact details. You can check the financial service register to make sure you are dealing with a regulated company. Hang up and call them back on details you can verify

Never give your personal details out, such as an insurance or pensions policy number or other account details

Always use contact details on your documents provided by your insurer or pension provider

Don’t assume all online sites are genuine

How secure is the future of your family or business?

Projecting ourselves into the future to see what’s around the next bend is not an easy thing to do

Given the current situation during this difficult and unsettling time with coronavirus (COVID-19), it’s important to think about how secure the future of your family or business would be in the event that you were no longer around.

Understandably, we would rather not think of the time when we’re no longer around, but this crisis has highlighted the importance of protecting the things that really matter – like our loved ones, home, lifestyle and business – in case the unexpected happens.

The outbreak of the coronavirus may mean you have concerns about your life insurance and whether you’re covered. If you have life insurance to provide for those left behind, or to cover business loans after your death, it’s important to keep paying the premiums, even if you’re tempted to put it on hold to cut costs. You could lose your cover and may struggle to find the same level of cover if you start another policy later on.

Full replacement value

For many of us, projecting ourselves into the future to see what‘s around the next bend is not an easy thing to do. However, without thinking, we insure our cars, homes and even our mobile phones – so it goes without saying that you should also be insured for your full replacement value to ensure that your loved ones and business are financially catered for in the event of your unexpected death. Making sure that you have the correct type and level of life insurance in place will help you to financially protect them.

Life insurance provides a safety net. Ultimately, it offers reassurance that your family and business would be protected financially should the worst happen. We never know what life has in store for us, as we’ve seen in recent weeks with the outbreak of COVID-19, so it’s important to get the right life insurance policy. A good place to start is asking yourself three questions: What do I need to protect? How much cover do I need? How long will I need the cover for?

Ask yourself

Who are your financial dependents – your husband or wife, registered civil partner, children, brother, sister, or parents?

What kind of financial support does your family have now?

What kind of financial support will your family need in the future?

What kind of costs will need to be covered, such as household bills, living expenses, mortgage payments, educational costs, debts or loans, or funeral costs?

What amount of outstanding business loans do I have now?

Financial safety net

It may be the case that not everyone needs life insurance. However, if your spouse and children, partner or other relatives, or business depend on you to cover the mortgage, other living and lifestyle expenses, or business loans, then it will be something you should consider. Putting in place the correct level of life insurance will make sure they’re taken care of financially.

That’s why obtaining the right professional financial advice and knowing which products to choose – including the most suitable sum assured, premium, terms and payment provisions – is essential.

No one-size-fits-all solution

There is no one-size-fits-all solution, and the amount of cover – as well as how long it lasts for – will vary from person to person. Even if you consider that currently you have sufficient life insurance, you may probably need more later on if your circumstances change. If you don’t update your policy as key events happen throughout your life, you may risk being seriously under-insured.

As you reach different stages in your life, the need for protection will inevitably change. How much life insurance you need really depends on your circumstances – for example, whether you have a mortgage, you’re single or have children, or you have business loans that you are liable to pay.

Coronavirus impact on the global economy

It’s more important than ever to stay the course

The coronavirus (COVID-19) outbreak is first and foremost a human tragedy, affecting hundreds of thousands of people. It is also having a growing impact on the global economy. The markets have been extremely volatile as investors weigh the effect of the coronavirus against measures aimed at easing its economic impact. Therefore, it’s hard to say how this will affect investments in the short term.

Even with events like the coronavirus and global market volatility dominating the headlines, the key is to keep calm and remember that ups and downs are a normal function of markets, and part and parcel of investing. Bear markets are a fact of any investor’s life. Single-day volatility will continue to be common, and we can expect choppy markets as investors and firms react to the ongoing pandemic.

Recalibrating the markets’ outlook

If the markets follow the pattern established over the past few months, sudden market drops have been followed by similarly acute intra-day upswings as the markets absorb the news and recalibrate their outlook.
What we’ve recently been experiencing is global stock market lows not seen since the 1987 market crash – and as a consequence, many hard-hit companies have laid thousands of employees off. However, it’s important not to let global uncertainties affect your financial planning for the years ahead.

‘Prepare, don’t predict’ approach

When markets look worrying, a ‘prepare, don’t predict’ approach can often be the best strategy. Understandably, market falls can be unnerving and make you question your investments. A few months in, it is still hard to grasp the scale and scope of COVID-19’s global impact. A third of the world population has been under some sort of ‘lockdown’. Over 200 countries have been affected, and the number of new cases and deaths in many places has grown exponentially. All the while, a second crisis in the form of an economic recession is underway.

The increasing concerns surrounding the coronavirus outbreak pandemic have had a significant impact on markets around the world. However, performance chasing can be a costly mistake not only due to the narrow investment choices it encourages, but also due to the higher costs and taxes incurred. Overall, investors can end up selling low, buying high and, importantly, missing out on creating long-term value.

Financial planning for the years ahead

Remember that the overall direction of developed stock markets is a relentless and continual rise in value over the very long term, punctuated by falls. It’s important not to let global uncertainties affect your financial planning for the years ahead. Individuals who curtail their investment planning, particularly during market downturns, often miss out on opportunities to invest at lower prices.

Such volatility is less worrying if you take a longer-term view. It’s important to stick to your strategy and keep moving ahead consistently by spreading risk and growing your wealth. Volatility in stock markets understandably makes investors nervous. However, on the flipside, not all volatility is bad – without volatility, stock prices would never rise.

Retirement matters

There’s a lot to look forward to

In your 50s, it’s important to make retirement planning a priority if you haven’t done so already. At this age, retirement is no longer a distant concept, and time is short if your plans aren’t on track.

This means it’s crucial to think about your retirement income goals and the steps that you need to take to achieve those goals.

Variables to consider

One of the most important things to do in your 50s is to work out how much money you’ll need to retire comfortably. You will have many variables to consider, including the age that you plan to retire, your life expectancy, your income requirements in retirement, your expected investment returns, inflation, tax rates and whether you qualify for the State Pension.

Once we’ve worked out how much money you’ll need to retire, we can then determine whether you’re on track to reach your goals. We’ll do this by working out how much money you have saved for retirement now across your various pension, investment and savings accounts, and projecting your total retirement savings into the future.

Providing more clarity

If you have multiple pension accounts, and if appropriate, it may be worth considering a pension consolidation at this stage of the process. This can provide you with more clarity in relation to your overall pension savings and make it easier to plan for retirement. You may also benefit from lower costs.

Many people realise in their 50s that their pension savings are a little on the low side. For example, the 2019 Close Brothers Financial Wellbeing Index found that 46% of UK workers aged 55 and over felt unprepared to retire, with 45% of people in this age bracket stating that funding their retirement was one of their top three money concerns. Luckily, in your 50s, there is still time to boost your retirement savings significantly.

Grow pension savings

One of the most effective ways to grow your pension savings is to save money regularly into a Self-Invested Personal Pension (SIPP) account. This is a government-approved retirement account that enables you to hold a wide range of investments and shelters capital gains and income from HM Revenue & Customs.

SIPP contributions come with tax relief. Basic-rate taxpayers receive 20% tax relief, meaning an £800 contribution gets topped up to £1,000 by the Government, while higher-rate taxpayers and additional-rate taxpayers can claim an extra 20% and 25% tax relief respectively through their tax returns.

Tax relief purposes

For 2019/20, the annual pension contribution limit for tax relief purposes is 100% of your salary or £40,000, whichever is lower. However, you may be able to take advantage of ‘carry forward’ rules and make use of unused annual allowances from the previous three tax years if you had a SIPP open during this period.

Another option to consider is saving and investing within a Stocks & Shares ISA. Like the SIPP, this type of account allows you to hold a wide range of investments, and all capital gains and income are sheltered from the taxman. Each individual can contribute £20,000 per year into a Stocks & Shares ISA.

Asset allocation

Your 50s is also a good time to review your asset allocation. You’ll want to ensure that your asset allocation matches your risk profile now that you are getting closer to retirement. As you move closer to retirement, it’s sensible to begin reducing your exposure to higher-risk assets such as equities.

With retirement just around the corner, you don’t want to be overexposed to the stock market, as there is less time to recover from a major stock market shock. Your asset allocation is an issue that you’ll want to pay close attention to as each year passes in your 50s.

Debt reduction

It’s also sensible to focus on reducing your debt in your 50s. The less debt you carry into retirement, the better – and eliminating debt early could have a big impact on your overall retirement savings.

It goes without saying that higher-interest rate debt such as credit card debt should be prioritised and paid off as soon as possible. However, many people in their 50s also have mortgage debt, so it can make sense to prioritise this as well and pay this off completely. This can free up a substantial amount of cash flow that can then be redirected into your pension.

Regular reviews

Finally, in your 50s, it’s important to review your retirement plan on a regular basis. Retirement planning is a continual process, and the more frequently you review your progress, the more prepared you’ll be for retirement and the more in control you’ll feel. At a minimum, aim to review your retirement plan at least once per year to ensure that you’re on track to achieve your goals.

As with all of life’s plans, things go awry, opportunities can present themselves or you may simply have a change of heart. If you fail to go back to your financial plan, you may find years later that it hasn’t suited your goals and priorities for some time. It’s also the perfect time to reassess your life goals.

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.

TAX RULES ARE COMPLICATED, SO YOU SHOULD ALWAYS OBTAIN PROFESSIONAL ADVICE.

A PENSION IS A LONG-TERM INVESTMENT.

THE TAX BENEFITS RELATING TO ISA INVESTMENTS MAY NOT BE MAINTAINED.
THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

Bullish millennials

Putting money to work earlier allows more time for savings to grow

Millennials are more bullish than any other generation about their retirement savings, a major new study has found[1]. But with time on their side, should they be doing more?

Almost two fifths (38%) of millennial investors (aged between 18 and 37) globally are very confident they are saving enough now so they won’t run out of money in their retirement. That is more than 29% for Generation X (aged between 38 and 50) and 21% for Baby Boomers (aged between 51 and 70).

Bucking a common myth

Millennials say they are saving on average 15.9% (including employer contributions) of their income (wages plus any other earnings) specifically for their retirement. That too is more than Gen Xers (14.7%) and Baby Boomers (13.7%).

The results of the study appear to buck a common myth that millennials aren’t doing enough to save for their retirement. On the contrary, millennials appear to be saving a reasonable amount for their retirement, which is encouraging.

Miracle of compounding

The one thing that millennials have on their side over older generations is time, with up to 40 years or more until they are due to retire. Putting their money to work earlier allows more time for their savings to grow. It could also mean less of a scramble in the latter part of their careers if they have to make up shortfalls.

By starting early, millennials benefit more from the miracle of compounding – or, as Einstein called it, ‘the eighth wonder of the world’. Compounding involves earning a return not only on your original savings but also on the accumulated interest, or returns, earned on your past savings. That is why total contributions should be less the earlier you start saving, because you can earn returns on returns over a longer period.

Factors to consider

There are, of course, other factors to consider. Returns are by no means guaranteed, and careers can fluctuate too. Still, millennials are doing more than most when it comes to saving for retirement.

GIS 2019 found that millennials are saving more than the average non-retired investor aged 38 and above in most (20 out of 32) of the locations in which they live. Belgium (+9.0%), Austria (+8.5%) and Portugal (+5.3%) were the three locations where the disparity was highest between what millennials and non-millennials were saving, on average.

Source data:
[1] Schroders Global Investor Study (GIS) 2019, gathered from views of more than 25,000 investors in 32 locations around the world.