If the worst were to happen, would your bills still get paid?

Everyone should consider protection, even those who don’t have a family or a mortgage! Unless they have substantial savings or inherited wealth, most people rely on their salary to pay for everything. Over the years, you may have taken out a number of different insurance policies to give you and your family financial security. Perhaps this may have been when you started a family, took out a mortgage or became self-employed.

These policies are designed to give your loved ones peace of mind by helping make sure there will be enough money in place to cover bills and other expenses should you become critically ill, be unable to work or even die.

Although state benefits provide some support, few families want to rely on the state to maintain their standard of living. It is therefore crucial to keep abreast of the level of your cover.

Time to review

Your personal circumstances and needs will almost certainly have changed over time. Perhaps you have children who have since flown the nest, or you’ve paid off your mortgage.

You may also be entitled to benefits with your current employer that either overlap with polices you already have or leave things now important to you not covered.
It could be time to review these policies, and the level of cover they provide, to make sure they are still suitable.

Life cover protection

Life cover protection is designed to protect your family and other people who may depend on you for financial support. It pays a death benefit to the beneficiary of the life assurance policy.

If you have dependents or outstanding debts such as a mortgage, at the very least it should ensure your family can keep their home, but ideally it would also provide an additional sum as a financial buffer at a difficult time.

There are different types of policy available, from ‘whole of life assurance’ which covers you for your entire lifetime, to ‘term assurance’ policies which provide life cover for a fixed period of time – 10 or 20 years, for example – and are often used in conjunction with a mortgage.

Income protection cover

If something happened to you, would you be able to survive on your savings or on sick pay provided by your employer? If not, you’ll need some other way to keep paying the bills.

Income protection cover is designed to give you protection if you can’t earn an income due to ill health, a sickness or disability. These policies protect a portion of your salary, typically paying out between 50–70% of your income. You receive monthly, tax-free payments that cover some of your lost earnings if you are unable to work.
They are vital policies for those with dependents and liabilities, paying out until you can start working again, or until you retire, die or the end of the policy term – whichever is sooner. They cover most illnesses that leave you unable to work, and you can claim as many times as you need to while the policy lasts.

Critical illness cover

If you are diagnosed with a critical illness, it can have a severe impact on your finances, as you may need to take time off work for your treatment and recovery. Critical illness cover pays out a tax-free lump sum if you’re diagnosed with, or undergo surgery for, a specified critical illness that meets the policy definition.

It’s designed to help support you and your family financially while you deal with your diagnosis, so you can focus on your recovery without worrying about how the bills will be paid.

Each policy will have its own list of specified conditions it covers, and it is vital to familiarise yourself with the full list and when you can claim for these illnesses before you apply.

Family income benefit cover

Family income benefit is a term insurance which lasts for a set period of time. If something were to happen to you, you would want to be sure your family is taken care of when you’re gone.

The policy will pay out a monthly, tax-free income to your family if you die during the term, until the policy ends. So, if you take a 20-year family income benefit policy and die after five years, it will continue to pay out for another 15 years.

There is no cash in value, so if you stop making premium payments, your cover will end.

Private medical insurance

Private medical insurance will pay for the cost of private healthcare treatment if you are sick or injured. If you don’t already have it as part of your employee benefits package, and you can afford to pay the premiums, you might decide it’s worth paying extra to have more choice over your care.

It gives you a choice in the level of care you get and how and when it is provided. Basic private medical insurance usually picks up the costs of most in-patient treatments (tests and surgery) and day-care surgery.

Some policies extend to out-patient treatments (such as specialists and consultants) and might pay you a small fixed amount for each night you spend in an NHS hospital. Premiums are paid monthly or annually, but most policies do not cover pre-existing conditions.

THE PLAN WILL HAVE NO CASH IN VALUE AT ANY TIME AND WILL CEASE AT THE END OF THE TERM. IF PREMIUMS ARE NOT MAINTAINED, THEN COVER WILL LAPSE.

CRITICAL ILLNESS PLANS MAY NOT COVER ALL THE DEFINITIONS OF A CRITICAL ILLNESS. THE DEFINITIONS VARY BETWEEN PRODUCT PROVIDERS AND WILL BE DESCRIBED IN THE KEY FEATURES AND POLICY DOCUMENT IF YOU GO AHEAD WITH A PLAN.

What does wealth look like to you?

Whether it’s stopping smoking, losing weight, eating more healthily or getting fitter, most of us have probably made at least one New Year’s resolution, but how many of us will actually go on to achieve it? We all have different financial goals and aspirations in life, yet these goals can often seem out of reach. In today’s complex financial environment, achieving your financial goals may not be that straightforward.

This is where financial planning is essential. Designed to help secure your financial future, 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.

If your New Year’s resolutions include giving your financial plans an overhaul, here are our tips to help you create a robust financial plan for 2020 and beyond.

Be specific about your objectives

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.
It is often said that saving and investing are nothing more than deferred consumption. Therefore, 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, it’s important 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.

Keep them realistic

It’s good to be an optimistic person, but being a Pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, being overly unrealistic can definitely impact on your chances of achieving them.

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.

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 into 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.

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.

Always account for inflation

It’s often said that inflation is taxation without legislation. Therefore, you need to account for inflation whenever you are putting a monetary value to a financial goal that is far away in the future. It’s important to know the inflation rate when you’re thinking about saving and investing, since it will make a big difference to whether or not you make a profit in real terms (after inflation).

In both 2008 and 2011, inflation climbed to over 5% – not good news for savers. So always account for inflation. You could use the ‘Rule of 72’ to determine, at a given inflation rate, how long it will take for your money to buy half of what it can buy today. The ‘Rule of 72’ is a method used in finance to quickly estimate the doubling or halving time through compound interest or inflation respectively. Simply divide 72 by the given interest rate, or inflation rate, to find the number of years in which you would double or halve your money.

Risk protection plays a vital role

It’s best to discuss your goals with those you’re closest to and make plans together so that you are well aligned. An evaluation of your assets, liabilities, incomings and outgoings will provide you with a starting point. You’ll be able to see clearly how you’re doing and may find areas you can improve on.
Risk protection plays a vital role in any financial plan as it helps protect you and your family from unexpected events.

Check you’re using all of your tax allowances

With tax rules subject to constant change, it’s essential that you regularly review your own and your family’s tax affairs and plan accordingly. Tax planning affects all facets of your financial affairs. You may be worried about the impact that rises in property values are having on gifts or Inheritance Tax, how best to dispose of shares in a business, or the most efficient way to pass on your estate.

Utilising your tax allowances and reliefs is an effective way of reducing your tax liability and making considerable savings over a lifetime. When it comes to taxes, there’s one certainty – you’ll pay more tax than you need to unless you plan. The UK tax system is complex, and its legislation often changes. So it’s more important than ever to be tax-efficient, particularly if you are in the top tax bracket, making sure you don’t pay any more tax than necessary.

Creating your comprehensive financial plan

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.

Identifying your retirement freedom options

Retirement is a time that many look forward to, where your hard-earned money should support you as you transition to the next stage of life. The number of options available at retirement has increased with changes to legislation, which have brought about pension freedoms over the years. The decisions you make regarding how you take your benefits may include tax-free cash, buying an annuity, drawing an income from your savings rather than pension fund, or a combination.

Beginning your retirement planning early gives you the best chance of making sure you have adequate funds to support your lifestyle. You may have several pension pots with different employers, as well as your own savings to withdraw from.

Monitoring and reviewing your financial plan

There is little point in setting goals and never returning to them. You should expect to make alterations 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 will be highly beneficial, as we can provide an objective third-party view, as well as the expertise to help advise you with financial planning issues.

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.

CRITICAL ILLNESS PLANS MAY NOT COVER ALL THE DEFINITIONS OF A CRITICAL ILLNESS. THE DEFINITIONS VARY BETWEEN PRODUCT PROVIDERS AND WILL BE DESCRIBED IN THE KEY FEATURES AND POLICY DOCUMENT IF YOU GO AHEAD WITH A PLAN.

THE PLAN WILL HAVE NO CASH IN VALUE AT ANY TIME AND WILL CEASE AT THE END OF THE TERM. IF PREMIUMS ARE NOT MAINTAINED, THEN COVER WILL LAPSE.

Reaching the big 50 can be a financial wake-up call

Your 50s are a crunch time when saving for your retirement. If you’ve already set a retirement savings target but have been neglecting it, the reality is that now you can’t afford to delay your planning any further – and it’s time for a careful review.

Are you on track to retire when you want to? Do you have enough in your pension pot to retire comfortably? A comfortable lifestyle means different things to different people. If you’re 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.

Will you have enough money for retirement?

One of the advantages you have in your 50s is that you are no longer relying on very long-term projections to determine if you have enough for retirement. The decision to retire will also depend on how financially independent you are, how healthy you are and even perhaps whether you have hobbies or goals you’ll want to pursue.

Now is the time to think about your retirement income goals and the steps that you need to take to achieve your goals. One of the most important things to do in your 50s is to work out how much money you’ll need to retire comfortably.

There are 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.

Given the number of variables, this part of the retirement planning process is not always straightforward.

Do you know the answer to these questions?

Q: When do I want to retire?
Q: How much income do I want in retirement?
Q: Do I have previous personal or company pension plans that need reviewing?
Q: Can I work part-time and take some of my pension?
Q: How much will my State Pension be?
Q: Where is my pension money invested, and is it growing?
Q: Can I retire early?

Providing you with more clarity

Nowadays, it’s common for many people to have accumulated an array of different pension agreements throughout their working life. By the time you have been working for a decade or two, you may have accumulated multiple pension plans on your career journey.

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

But not all pension types can or should be transferred. It’s important that you know and compare the features and benefits of the different pension agreements you are thinking of transferring. It is a complex decision to work out whether you would be better or worse off combining your pensions.

Alternative way to grow your pension savings

In your 50s, one alternative way 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 (HMRC).

SIPP contributions receive tax relief. Basic-rate taxpayers benefit from 20% tax relief, meaning an £800 contribution is 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. Please note that the tax relief claimed from your tax return won’t be automatically added to your SIPP.

There is a limit to how much tax relief you are entitled to. It is currently applicable to contributions up to £40,000 or 100% of your earnings – whichever is lower. Another special feature is the three-year carry-forward rule. This rule allows you to carry the last three tax years’ annual allowance into the current tax year.

This is a useful feature for people who were unable to use up their annual allowances in the past but have the ability to do so for the current tax year. You must use this year’s allowance before using the carry forward rule.

There is also the option to invest 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 HMRC. Each individual can contribute £20,000 per year into a Stocks & Shares ISA.

Good time to review your 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, and if appropriate to your situation, it may be sensible to begin reducing your exposure to higher-risk assets such as equities.

You need to pay close attention to your asset allocation and consider de-risking your portfolio. 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 correction.

If retirement beckons in the short to medium term, you may look to build a sustainable portfolio with perhaps an emphasis on greater income and reduced volatility and risk. However, moving away from an exposure to growth assets entirely or too early can be very expensive, so it’s essential you obtain professional financial advice before taking any action.

Unless your situation is unusual, some retention of these growth assets is going to be required during a retirement that could last more than 30 years. It’s important to balance the need for liquidity and an exposure to growth assets.

Review your retirement planning on a regular basis

Finally, in your 50s, it’s important to review your retirement planning on a regular basis. As with any other aspect of your personal finances, it’s essential to conduct regular reviews of your pension arrangements to ensure that they fit best with your current situation.

A regular review will ensure healthy progression towards retirement by checking that you are firmly on track with your retirement goals. This is the time to adjust your plan to fit any evolving needs and desires for your post-retirement years. We all change as people over time, and our pension pot needs to reflect our most current reality.

Retirement planning is a continual process, and the more often 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 planning at least once annually to ensure that you’re on track to achieving your retirement goals.

A PENSION IS A LONG-TERM INVESTMENT.

TRANSFERRING OUT OF A FINAL SALARY SCHEME IS UNLIKELY TO BE IN THE BEST INTERESTS OF MOST PEOPLE.

THE FUND VALUE MAY FLUCTUATE
AND CAN GO DOWN, WHICH WOULD HAVE
AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

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.

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.

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

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.

Time to explore your ISA options?

An Individual Savings Account (ISA) enables you to save in a simple, tax-efficient way, while generally giving you instant access to your money. This gives you short, medium and long-term saving options, and with the end of the current tax year not too far away, it’s important to make the most of your annual tax-free ISA allowance.

UK residents aged 16 or over can save up to £20,000 a year (for the 2019/20 tax year) into a Cash ISA. Those aged 18 or over can save in a Cash or Stocks & Shares ISA, or combination of ISAs.

Tax-efficient wrapper

ISAs are a very tax-efficient wrapper in which you can buy, hold and sell investments. For any ISA contributions to count for the current tax year, you must save or invest by 5 April.

Also, don’t forget that any unused ISA allowance can’t be rolled over into a subsequent tax year, so if you don’t use it, you’ve lost it forever. Even though you’ll receive a new allowance for the next tax year, you are not permitted to contribute anything towards a previous ISA.

Types of ISA options

• Cash ISAs – these are savings accounts that are tax-free, with the maximum allowable contribution set at £20,000 in the current tax year
• Junior ISAs – these are tax-free savings accounts in which under-18s can save or invest maximum contributions up to £4,368 in the current tax year
• Stocks & Shares ISAs – these are investments that are classed as tax-efficient, with the maximum allowable contribution set at £20,000 in the current tax year
• Innovative Finance ISAs – these are peer- to-peer lending investments that are classed as tax-efficient, with the maximum allowable contribution set at £20,000 in the current tax year. However, they are considered high risk, and it may not be possible to get your money out quickly. Some may not be protected by the Financial Services Compensation Scheme
• Lifetime ISAs – these can be either classed as savings (tax-free) or investments (tax-efficient). You must be aged between 18 to 39, and the maximum allowable contribution is set at £4,000 in the current tax year
• Help to Buy: ISAs – these were set up to help those saving for their first home and were only available to new savers until 30 November 2019. Existing savers can continue saving, although they must claim their government bonus by 1 December 2030.

Key elements

Goals, time horizon, risk and diversification are key elements to consider when saving and investing. You could put all the £20,000 into a Cash ISA, or invest it in a Stocks & Shares ISA or an Innovative Finance ISA. Alternatively, you could split your allowance between Cash ISAs, Stocks & Shares ISAs, Lifetime ISAs or Innovative Finance ISAs, depending on your specific situation and requirements.

If you are not sure what to invest in, you could temporarily hold your annual ISA allowance in cash in the short term and invest thereafter. However, cash is not good for the long term because inflation has the potential to erode its value.

Transfer investments

If you don’t have £20,000 in new money to invest, you could transfer investments outside a tax-efficient wrapper into an ISA.
ISAs can also be passed on death to a surviving spouse or registered civil partner. The surviving spouse is entitled to an additional, one-off ISA allowance, equal to the value of the deceased’s ISA holdings. This enables the surviving spouse to effectively re-shelter assets which were in a spouse’s ISA into an ISA in their own name.

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 TAX BENEFITS RELATING TO ISA INVESTMENTS MAY NOT BE MAINTAINED.
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.

What rising life expectancy could mean for you

We know that age is just a number, and for different people it means different things. It’s also a phrase used by some people who oppose age restrictions. In the UK, 65 years of age has traditionally been taken as the marker for the start of older age, most likely because it was the official retirement age for men and the age at which they could draw their State Pension.

No longer an official retirement age

In terms of working patterns, age 65 years as the start of older age is out of date. There is no longer an official retirement age, State Pension age is rising, and increasing numbers of people work past the age of 65 years.

People are also living longer, healthier lives according to the latest findings from the Office for National Statistics[1]. In 2018, a man aged 65 could expect to live for another 18.6 years, while a woman could expect to live for 21 more years. So, on average, at age 65 years, women still have a quarter of their lives left to live and men just over one fifth.

Start of older age has shifted

An important further consideration is that age 65 years is not directly comparable over time; someone aged 65 years today has different characteristics, particularly in terms of their health and life expectancy, than someone the same age a century ago.

In a number of respects, it could be argued that the start of older age has shifted, but how might this be determined? Should we just move the threshold on a few years – is age 70 really the new age 65? Or, might there be a better way of determining the start of older age?

Population projected to continue to age

At a population level, ageing is measured by an increase in the number and proportion of those aged 65 years and over and an increase in median age (the age at which half the population is younger and half older).

On both of these measures, the population has aged and is projected to continue to age. In 2018, there were 11.9 million residents in Great Britain aged 65 years and over, representing 18% of the total population. This compares with the middle of the 20th century (1950) when there were 5.3 million people of this age, accounting for 10.8% of the population.

Oldest old are the fastest-growing age group

Looking ahead to the middle of this century, there are projected to be 17.7 million people aged 65 years and over (24.8% of the population). The oldest old are the fastest-growing age group, with the numbers of those aged 85 years and over projected to double from 1.6 million in 2018 to 3.6 million by 2050 (5% of the population).
The balance of older and younger people in the population has also tipped more towards older people, reflected in a rising median age up from 34 years in 1950 to 40 years in 2018. By the middle of this century, it is projected that median age will reach 43 years.

Source data:
[1] Office for National Statistics – November 2019

Planning ahead helps ensure that you’re on track

You work hard to enjoy your current lifestyle, but are you doing enough to ensure that you will continue to enjoy it in retirement? Many of us live for today, but saving into a private pension plan can help you retire sooner rather than later.

The term ‘private pension’ covers both workplace pensions (also known as ‘occupational’ or ‘company’ schemes), arranged by your employer; and ‘personal pensions’, which you manage yourself. There is no restriction on how many pensions you can have, and some people will have both.

Am I still saving enough for retirement according to my current circumstances?

Private pensions, often referred to as ‘personal pensions’, provide a way for you to save for retirement so that you’ll have an income to supplement the amount you’ll receive from the State Pension.

They are generally ‘defined contribution’ plans, which means any payments you make are invested. The amount you end up with at retirement depends not only on how much you’ve paid in, but also on how your investments have performed and the level of charges. We can assess your current retirement goals and calculate the target level of income you’ll require to achieve them.

Don’t forget: if you have a workplace private pension, both you and your employer will make contributions, boosting the amount you end up with at retirement.

Can I rely on the State Pension to provide a substantial income in retirement?

The State Pension is a regular income paid by the UK Government to people who have reached State Pension age. The State Pension changed on 6 April 2016. If you reached the State Pension age on or after this date, you’ll now be getting the new State Pension under the new rules.

The new State Pension is designed to be simpler than the old system. The new scheme pays up to £168.60 a week (as of 2019/20). It’s possible you may receive more or less than this amount.

To receive £168.60, you must have a National Insurance (NI) contributions record for 35 years. If not, the amount you receive will be proportionate. If you have less than 10 years’ NI contributions, you won’t receive any State Pension. You can pay more to make up for any shortfall in your NI contribution record.

You may receive less if you opted out of the additional State Pension scheme, or ‘SERPS’. This scheme ended in April 2016. If you were in a pension scheme or personal pension plan before this date, this may apply to you.

If you were entitled to a higher pension under the previous State Pension scheme, you’ll still receive this. If you don’t claim your State Pension in the year you reach State Pension age, it will be increased when you do take it. For each year you delay, it increases by almost 5.8%.

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

Am I making the most of pension tax relief?

One major benefit of contributing to a pension is the boost your contributions will receive from tax relief. Pension providers can claim basic-rate tax relief at 20% on behalf of savers. So for every £80 you contribute, £100 will be invested into your pension. You receive tax relief on private pension contributions worth up to 100% of your annual earnings.

Tax relief is paid on your pension contributions at the highest rate of Income Tax you pay. If you’re a higher or additional-rate taxpayer, you must claim back the additional 20% or 25% on top of the basic 20% via your self-assessment tax return. If you don’t claim it, you won’t receive it.

Tax relief in England, Wales or Northern Ireland:

• Basic-rate taxpayers get 20% pension tax relief
• Higher-rate taxpayers can claim 40% pension tax relief
• Additional-rate taxpayers can claim 45% pension tax relief

In Scotland, Income Tax is banded differently, and pension tax relief is applied in a slightly alternative way:

• 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

How much more should I be saving for retirement?

Generally speaking, the more you save, the more you can expect to get back. You can choose to save as much as you can afford. If you want to, you could save up to 100% of your earnings into your pension each tax year. However, there’s an upper limit on the amount that you can save into pensions each tax year.

This is known as the ‘annual allowance’, which is currently £40,000 in the 2019/20 tax year. If you go over this amount, a 40% tax charge will apply. Obtaining professional financial advice will ensure that you are contributing the correct amounts based on your retirement goals.

Will there be limits on the value of payouts from my pensions?

The lifetime allowance is a limit on the value of payouts from your pension schemes – whether lump sums or retirement income – that can be made without triggering an extra tax charge.

But the regular contributions you and your employer make into pensions, plus the fact investments in pensions grow free of tax typically over a long time, can result in your pensions growing above the lifetime allowance.

The lifetime allowance for most people is £1,055,000 in the tax year 2019/20. It applies to the total of all the pensions you have, including the value of pensions promised through any defined benefit schemes you belong to, but excluding your State Pension. The standard lifetime allowance is indexed annually in line with the Consumer Prices Index (CPI).

Any amount over your lifetime allowance that you take as a lump sum is taxed at 55%, and any amount over your lifetime allowance that you take as a regular retirement income – for instance, by buying an annuity – attracts a lifetime allowance charge of 25%.

How can I make the most of my pension pot when I retire?

How long your pension pot lasts will depend on the choices you make. From age 55, there are three main ways you can take your money. You can take your tax-free money first, take a combination of tax-free and taxable money, or take a guaranteed income for life. You could also take a combination of these three, or simply do nothing at all.

Each of the main options usually allows you to take up to 25% of your pot tax-free. You might also need to pay tax on the remaining 75% of your pension pot, depending on your circumstances and the options you choose. Tax rules can also change in the future.

The ways to access your tax-free money, and the remainder of your pension pot, are very different on each of the options though.

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.

Calculating the value of financial advice

Quantifying the value of financial advice has always been a challenge because people who receive financial advice have different characteristics to those who do not. But what if it was now possible to quantify the value of financial advice and isolate a pure ‘advice effect’? This is exactly what the researchers at the International Longevity Centre – UK (ILC) have been able to calculate.

What it’s worth

The new research[1], ‘What it’s worth: Revisiting the value of financial advice’ from the ILC suggests that, holding other factors constant, those who received advice around the turn of the century were on average over £47,000 better off a decade later than those who did not.

This result comes from detailed analysis of the Government’s Wealth and Assets Survey, which has tracked the wealth of thousands of people over two yearly ‘waves’ since 2004 to 2006. The wealth uplift from advice comprises an extra £31,000 of pension wealth and over £16,000 extra in non-pension financial wealth.

Impact of taking advice

One of the key findings from the research is that the proportionate impact of taking advice is greater for those of more modest means. For the ‘affluent’ group identified in the research, the uplift from taking advice is an extra 24% in financial wealth compared with 35% for the non-affluent group. On pension wealth, the uplift is 11% for the affluent group compared with 24% for the non-affluent.

An important explanation for the improved outcomes for those who take advice is that they are more likely to invest in assets which offer greater returns (though with higher risk). Across the whole sample, the impact of taking advice is to add around eight percentage points to the probability of investing in equities.

Larger pension pots

The research also found that those who were still taking advice at the end of the period had pension pots on average 50% higher than those who had only taken advice at the beginning of the period. However, this result is not controlled for other differences in characteristics, so may at least in part reflect greater engagement by those who have larger pension pots.

International Longevity Centre Director, David Sinclair, commented: ‘The simple fact is that those who take advice are likely to be richer in retirement. But it is still the case that far too many people who take out investments and pensions do not use financial advice. And only a minority of the population has seen a financial adviser.’

Source data:
[1] ‘What it’s worth: Revisiting the value of financial advice’ was published on 28 November 2019 at http://www.ilcuk.org.uk and http://www.royallondon.com/policy-papers.

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.

Plan for the future you want

Early retirement is no longer defined as the moment when you stop working forever. For many people, it’s simply the moment when you no longer have to work for money. But this also means being in a financial position to choose to keep working if you enjoy what you’re doing.

Retiring at 55 is an attainable target if you start early and develop a sound financial plan. It’s worth remembering there’s a big difference doing work you love or a job that you could leave if you get tired of it, because you have the financial freedom and flexibility that saving up enough money can give you.

Lifestyle and spending habits

So the question is, ‘How do you know how much money is enough to last through your golden years if you want to retire early?’ The answer is a highly personal one and depends on your lifestyle and spending habits.

For many people, early retirement means being able to make the shift from work they have to do to work they want to do. Taking an early retirement appeals to many people unsurprisingly, but making it a reality requires careful consideration and a well-thought-out approach to retirement planning.

Maximising your income

Working towards an early retirement strategy is built on maximising your income – how much money you’re making; expenses – how much money you’re spending; and saving – how much money you’re saving and investing.

Can you access the State Pension, the pension you receive from the state? The answer is ‘no’ if you want to retire early; the age at which you can receive your State Pension is changing for both men and women depending on when you were born.

Feeling under-prepared

Your State Pension will not be available to claim at 55, so do not include this when working out your income for the first part of your retirement. In the UK, the State Pension age will rise for both men and women until it reaches 66 in October this year and 67 between 2026 and 2028. However, 46% of UK workers, according to research[1], who are currently aged 55 and over say they feel under-prepared for their retirement.

For some people who want to wave goodbye to the 9 to 5 grind and retire early, it may seem like a pipe dream. The good news is that you can usually access private pensions from the age of 55, which makes it an age often associated with retirement. However, retiring early may affect both your private or company pension.

Assets to produce income

The rules for private and company pensions vary, depending on who provides them. We can help you to check this to see how early retirement could affect your own situation. But if you do intend to retire at 55, you will need your assets to produce income for a longer period than someone who retires later.

It means developing an accurate projection of what you think you will spend each year. Then you can compare that to the sources of retirement income you think you’ll have available to you.

Opportunity to grow

The benefit of starting a pension early on and contributing to it regularly means you’re able to take advantage of the compounding effect. Compound interest causes your wealth to snowball and allows you to earn interest on top of both your savings and existing interest, and it accumulates over time, meaning the longer you save, the more your pension has the opportunity to grow.

It makes a sum of money grow at a faster rate than simple interest, because in addition to earning returns on the money you invest, you also earn returns on those returns at the end of every compounding period, which could be daily, monthly, quarterly or annually.

Comfortable lifestyle

If you’re looking to retire at 55, you’re much more likely to have the comfortable retirement you dream of if you started saving for it early in adult life. Otherwise, you may wish to increase the contributions into your pension pot so you can meet the level of income you will need for a comfortable lifestyle.

So how much will you need when you retire? One way of estimating how much you’ll need is by referring to the widely used ’70%’ rule, which states that you’ll require 70% of your working income to maintain the same level lifestyle.

Unexpected costs

Whilst this gives you a good idea of the amount you’ll require when considering retirement, you may find that you’ll need more or less. You should consider what you plan to do in retirement and account for unexpected costs, such as long-term care, as these will need to be factored in to help you estimate your retirement costs.

Creating an overall budget and living costs as well as other expenditure you’d like to plan for, such as holidays, will further help you reach a more realistic retirement target figure. If you’re planning to retire early, your money will need to last longer, therefore it’s important to account for the extra years.

Pension tax relief

The Government automatically adds basic-rate tax relief of 20% to pension contributions. If you pay tax at the higher rate, the tax relief percentage increases to up to 45%, depending on your income. It’s important to double check that you’re claiming pension tax relief. If you have a personal pension, and you’re a higher or additional-rate taxpayer, you will need to complete a self-assessment tax return to receive the extra relief due.

It’s worth bearing in mind that the annual allowance gives you £40,000 as the maximum amount you can pay into your pension(s) each year and get tax relief on. It’s possible to use ‘carry forward’ to reduce your tax charge if you go over the annual allowance limit by carrying forward unused annual allowances from the last three years. There are conditions to using carry forward that need to be met, and pensions rules can change.

Withdrawing income

When and how you can withdraw from a pension will depend on the type of pension you have, your personal circumstances and your retirement goals. At 55, you can choose to take your pension as a lump sum (once or periodically), as an income (an annuity that provides guaranteed income) or as a mix of both.

How you choose to draw your income is up to you, with 25% available as a tax-free lump sum, and the rest taxed. Withdrawing your income is a crucial decision that you often cannot go back on once it’s made, so be sure to only make your choices after weighing up your options carefully.

Data source:
[1] 2019 Close Brothers Financial Wellbeing Index – https://www.finder.com/uk/pension-statistics

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.

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.

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.

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.

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.