Dot-com crash to global financial crisis

Busting the myths of investment companies’ performance

Saturday 15 September 2018 marked ten years since the collapse of Lehman Brothers. And with the bull market following the global financial crisis – now the longest in history in the US – it’s useful to revisit the past. The Association of Investment Companies (AIC)[1] has looked at the long-term performance of investment companies from just before the dot-com bubble burst in 2000 and just after the collapse of Lehman Brothers in October 2007.

Dot-com bubble
The bursting of the dot-com bubble in March 2000 caused the FTSE 100 to enter a period of significant decline, reaching its lowest levels around October 2002. A £1,000 investment in the average investment company at the beginning of March 2000, just before the downturn, would have recovered and grown to a staggering £4,350 at the end of August 2018 – a gain of 335%. While 18-and-a-half years is a long time, it includes a recovery from both the dot-com crash and the global financial crisis and is an example of the benefits of long-term investing, particularly when the original £1,000 investment would have initially fallen to £660 in October 2002 before recovering.

Global financial crisis
The global financial crisis of 2007 to 2009 was a period of market turmoil and a major economic downturn. A £1,000 investment in the average investment company at the beginning of October 2007, when markets were near their highest levels before the crash began, would now be worth £2,470 (end August 2018) – a 147% increase almost 11 years later. This is particularly impressive given that the investment fell to £580 around the time of the market low in February 2009, and it demonstrates again the benefits of investing with a long-term view.

Investing over the long term
The data suggests that even when investing near-market highs, lump sum investments beat regular investments over the long term. For example, a £50 monthly investment in the average investment company from October 2007 to August 2018 (£6,550 invested) would now be worth £13,736 (end August 2018) – a gain of 110%. However, a lump sum investment of £6,550 over the same time frame would now be worth £16,178 – a gain of 147%. Over longer time frames, the difference is even greater. Investing £50 a month in the average investment company from March 2000 to August 2018 (£11,100 invested) is now worth £37,240 – an increase of 235%. Whereas £11,100 invested as a lump sum over the same period is now worth £48,281 – an increase of 335%.

Time in the market, not timing the market
It can be tempting to try to time stock market investments, but the saying ‘time in the market, not timing the market’ really has held true. Investors who invested in investment companies at the top of the market before the financial crisis and were able to hold on through the downturn would still have generated very strong returns over the long term.

Smooth the volatility of markets
Investing in lump sums has outperformed regular investing over these longer time frames as more money has been invested in an ultimately rising market. However, regular investments are a convenient way to invest for people who do not have a lump sum, and they allow anxious investors to sleep more soundly at night because they smooth the volatility of markets.

Source data:
[1] The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 354 members, and the industry has total assets of approximately £188 billion.

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.

Festive gifts

Building wealth for a solid financial future

As a parent, guardian or grandparent, you’ll want to provide the best future for your children or grandchildren that you can. Christmas is an excellent time to encourage children to start thinking about the value of money. Many children have hundreds of pounds spent on them at Christmas. But could that money be put to better use? Rather than buying yet more toys for your children or grandchildren, why not consider setting up a tax-efficient Junior ISA for them?

With today’s kids likely to need thousands of pounds to get them through university and onto the property ladder, a Christmas gift that will help with some of these expenses is well worth considering.

If the investment is allowed to grow, it could build up into a sizeable sum. The money could then be given to the child as an adult. Depending on the amount invested, the capital may be enough to cover tuition fees and possibly board and lodging as well, or a deposit for their first property.

Junior Individual Savings Account (JISAs)
A JISA is a tax-efficient children’s savings account where you can make contributions on the child’s behalf, subject to an annual limit. Any gains do not incur Capital Gains Tax and they will not be considered part of the parents’ or grandparents’ estate for Inheritance Tax purposes.
Nevertheless, the child will automatically get access to the money when they turn 18 and can choose what to do with it.

There are two types of JISA – a Cash JISA and a Stocks & Shares JISA:

Junior Cash ISAs – these are essentially the same as a bank or building society savings account. But Junior Cash ISAs come with one big advantage: your child doesn’t have to pay tax on the interest they earn on their savings, and you don’t have to either

Junior Stocks & Shares ISAs – with a Junior Stocks & Shares ISA account, you can put your child’s savings into investments like shares and bonds. Any profits you earn by trading shares or bonds are tax-efficient

A child’s parent or legal guardian must open the Junior ISA account on their behalf. Money in the account belongs to the child, but they can’t withdraw it until they turn 18, apart from in exceptional circumstances. They can, however, start managing their account on their own from age 16.
The Junior ISA limit is £4,260 for the tax year 2018/19. If more than this is put into a Junior ISA, the excess is held in a savings account in trust for the child – it cannot be returned to the donor. Parents, friends and family can all save on behalf of the child as long as the total stays under the annual limit. No tax is payable on interest or investment gains.

When the child turns 18, their account is automatically rolled over into an adult ISA. They can also choose to take the money out and spend it how they like.

Pensions
A pension is one of the greatest gifts you could give children this Christmas. Children’s pensions benefit from the same advantages as adult pensions. That means the pension fund benefits from the favorable tax treatment, in terms of tax relief on contributions along with the tax advantages of the fund.

Investment account
For tax reasons, this approach may best be suited to grandparents. A grandparent can set up a designated account for a grandchild and invest a capital sum in it. The account remains under the full control and ownership of the grandparent, with any income and gains taxed as the grandparent’s own.

When the grandparent deems appropriate, the account can be gifted or assigned to the child. Where this occurs, the grandchild is legally entitled to the money at age 18, and can use it as they see fit – which may not necessarily be for education purposes. The transfer of ownership of the monies would be treated as a Potentially Exempt Transfer (PET). The value of the gift will be outside the grandparent’s estate after seven years. Many parents and grandparents want to set up their children or grandchildren to enjoy a secure financial future. Yet paying down student debt is not necessarily the best option if they have a spare capital sum to invest. They could also consider helping their children or grandchildren to save towards a deposit for a property or start a pension for them so that they have security in later life.

THE VALUE OF INVESTMENTS AND THE INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

A PENSION IS A LONG-TERM INVESTMENT, WHICH IS NOT NORMALLY ACCESSIBLE UNTIL AGE 55.

LEVELS, BASES OF AND RELIEFS FROM TAXATION MAY BE SUBJECT TO CHANGE, AND THEIR VALUE DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF THE INVESTOR.

Protecting your identity

Common ways fraudsters can steal your personal information

As individuals, throughout our lifetime we exchange personal information with a vast number of institutions including banks, credit card suppliers, utility companies, supermarkets, government organisations and retailers. This may be to receive important services, but also to allow us to do the fun things like shopping, eating out or going on holiday.

Fraudulent or stolen identities being used to make false applications for credit cards or loans, to obtain goods and services, or even to access money or other assets is naturally something that concerns us all. Worryingly, it is not untypical for a victim to first become aware of this when they receive a letter of demand for payment.

Of course, there are a number of basic things we can all do as individuals to protect ourselves against identity crime and reduce the risk of our personal information falling into the wrong hands. If you discover your identity has been stolen, act immediately. Following these steps will help to minimise the impact and prevent additional issues from arising.

1. Check your credit reports
At a small cost, you can check your credit file with a credit reference agency such as Call Credit, Equifax or Experian to help identify any activity that you are not aware of.

2. Monitor your mail
Make sure you receive all post that you are expecting. If you think post is missing, contact the Royal Mail. Also, arrange for the Royal Mail to re-direct post to your new address if you have moved house, and inform companies that you deal with regularly that you have moved.

3. Review bills and bank statements
Check bank, credit card and other financial statements frequently, and look out for transactions that you do not recognise. Check for fraudulent charges or suspicious activity. Report issues immediately. Consider receiving statements and bills electronically, setting up direct deposits, and using online bill pay.

4. Identity theft protection
Identity theft protection providers monitor your credit reports, as well as online debit and credit card number(s). If suspicious activity is detected, you will be notified and will receive identity recovery assistance.

5. Shred documents
Carefully dispose of documentation that contains personal details rather than just throwing them away. Use a cross-cut shredder to destroy envelopes and documents.

6. Secure your computer(s) and mobile devices
Whether a desktop, laptop, netbook, tablet or smartphone, your computer contains critical personal information.

To help protect your electronic devices, you should also:
Password-protect your device
Install and update operating system, antivirus and anti-spyware software. For smartphones, also install a ‘wiping’ program to erase all data remotely if it is lost or stolen
Use a personal firewall
When using a wireless network, activate WPA encryption and any other security features available. Change your router’s default password and SSID
Beware of ‘smishing’ – text messages containing links capable of downloading malware to your smartphone
Do not leave your device unattended or your screen visible to others
Close your browser when you’re finished with a secure session
Log off when you leave or step away

Use caution online
Only access personal and financial information from a computer you ‘trust’
Only do business with financial institutions and online merchants you know and trust. Watch out for copycat sites, and confirm the email address is correct
When accessing financial information or ordering online, be sure the site is secure. Look for a URL that begins with ‘https://’ and the ‘closed padlock’ symbol
Never reply to an email or pop-up message that requests you provide or update your personal information

On social media sites, it’s always a good idea to:
Review the privacy policy
Choose a challenging password
Don’t reveal your physical address, date of birth, school names or phone numbers
Use privacy settings

Volatility, risk and market declines

Relentless and continual rise in value over the very long term, punctuated by falls

There is an undeniable correlation between geopolitics, market sentiment and the macro trading environment. But over long periods, we have seen markets recover from downturns, although past performance is no indicator of future performance.

Corrections can be healthy and result in even stronger growth in the future, although this isn’t guaranteed and you could get back less than you invest. This is why holding a diversified portfolio for the long term makes good investing sense. It’s time invested in the market, and not the timing of the market, which dictates long-term returns.

Missing out on opportunities
The relentless and continual rise in value over the very long term is typically punctuated by falls. It’s important not to let global uncertainties affect your investment strategy for the years ahead. Individuals who stop investing, particularly during market downturns, can often miss out on opportunities to invest at lower prices.

Such volatility is less frightening 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. It’s volatility in stock markets that make investors nervous. But on the flipside, not all volatility is bad: without volatility, stock prices would never rise.

Avoid being blown off course
In practice, everyone’s investment goals are different. By deciding on your long-term financial priorities – whether it’s funding your children’s education or saving enough to be able to retire early – you can avoid being blown off course by short-term events.

Trying to second-guess the impact of events such as a global trade war, Brexit or a stock market correction, and tariff concerns or fears that earnings will continue to disappoint – 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.

Considered and strategic approach
Sensible diversification – owning a mix of assets, including shares, bonds and alternative investment such as property – can help protect investors over the long term. When one area of a portfolio underperforms, another part should provide important protection – and it’s never too early
or too late to start taking this considered and strategic approach.

Volatility, risk and market declines are a normal part of the investing cycle, but the media likes drama. Reports will use words that make these market fluctuations sound alarming, so be cautious about reacting to the unnerving 24/7 news cycle.

Reflecting risk tolerances and timelines
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 timeline, so stay committed. However, if you reacted and sold in a previous market decline or have not implemented a strategic asset allocation, then now is the time to have a discussion about your investment options.

Be aware of the psychological affect this type of volatility has on you as an investor, and resist the urge to be reactive. The recent decline was expected and is coming after financial markets as a whole have experienced a historic bull phase for close to ten years now. No one knows how severe any market turbulence will be or what the market will do next. It could be over quickly or linger for a while. But no matter what lies ahead, proper diversification and perseverance over the long term are what’s mo

Blending your retirement options

Balance of flexibility and security to suit your circumstances

If you are looking for a balance of flexibility and security to suit your circumstances, you could consider blending your retirement options. You don’t have to choose one option when deciding how to access your pension pot – you could set up a combination of options to suit you.

You can usually take up to 25% of your pension money as tax-free cash as you choose which options to take. But remember that with any option, tax benefits are subject to change and depend on your individual circumstances.

You can also keep saving into a pension, if you wish, and get tax relief up to age 75.

Which option or combination is right for you will depend on:

Your age and health
When you stop or reduce your work
Whether you have financial dependants
Your income objectives and attitude to risk
The size of your pension pot and other savings
Whether your circumstances are likely to change in the future
Any pension or other savings your spouse or partner has, if relevant

Everybody’s situation is different, so how you combine the options is up to you.

You could choose to buy a guaranteed income for life with some of your pension money, while leaving some to provide a flexible income or cash lump sums when you need them.

Or, if you plan to ease into retirement, you may choose to take some money flexibly to start with, and then later buy an annuity to provide a guaranteed income.

Don’t forget, in addition, you can usually take up to 25% of your pension tax-free. This can be taken all in one go or over time, depending on the options you choose.

Exploring your ISA options

Time to give your financial future a boost?

The end of the tax year on 5 April is fast approaching, so make sure you’ve made the most of your annual allowances before it’s too late. No matter what, why or how you want to save and invest, an Individual Savings Account (ISA) could help make your money work harder for you.

ISAs are tax-efficient wrappers. Every tax year, we each have an annual ISA allowance. If you don’t take full advantage of using all or part of it in one tax year, you cannot carry it over to the next.

There are various tax advantages to saving or investing through an ISA: you don’t pay Capital Gains Tax on any capital growth nor Income Tax on any income received, either as interest or dividends, from the investment or cash savings. Another advantage is that you don’t have to declare ISAs on your tax return.

Types of ISA and their allowances
There are currently six different types of ISA.

Cash ISA
Anyone over the age of 16 can put their cash savings into a Cash ISA. Accounts can be either instant access, have notice periods or have fixed terms.

The annual allowance for a Cash ISA is £20,000 (tax year 2018/19). You can invest up to this full amount in your Cash ISA, or you can share this allowance between the different types of ISA, with the exception of the Help to Buy ISA.

Stocks & Shares ISA
A Stocks & Shares ISA is a medium-to-long-term investment (five years or more). Anyone over the age of 18 can put individual shares or managed funds into a Stocks & Shares ISA. It enables you to decide how much risk you are prepared to take when investing, offering access to a range of funds and the potential for better returns than a Cash ISA over the long term.

The annual allowance for a Stocks & Shares ISA is £20,000 (tax year 2018/19). Again, you can invest up to this full amount in your Stocks & Shares ISA, or you can share it between the other types of ISA.

Innovative Finance ISA
This ISA is for investments in peer-to-peer lending platforms. You must be over the age of 18 to invest.

The annual allowance for an Innovative Finance ISA is £20,000 (tax year 2018/19). Once again, you can invest up to this full amount in your Innovative Finance ISA, or you can spread it out between various types of ISA.

Help to Buy ISA
Help to Buy ISAs are available to each first-time buyer, not each home. This ISA has been introduced to help first-time buyers over the age of 18 get on the property ladder. You have to choose between either a Cash ISA or a Help to Buy ISA, but you can have a Help to Buy and a Stocks & Shares ISA in the same tax year.

The Government will top up any contributions you make by 25%, up to the contribution limit of £12,000. So, for every £200 you save, the Government will contribute £50. This means you can earn a maximum of £3,000 from the Government. So, if you’re buying a property with your partner, for example, you’ll be able to get up to £6,000 towards your deposit.

The minimum amount you need to save to qualify for a government bonus is £1,600 (which gives you a £400 bonus). You can start off your ISA with an initial deposit of up to £1,000, which also qualifies for the 25% boost from the Government.

Another important factor is that the proceeds can only be used to buy a property worth up to £250,000 outside of London, and up to £450,000 within London.

Lifetime ISA
The Lifetime ISA is similar to the Help to Buy ISA. It is designed to help investors between the ages of 18 and 39 save for either a first house purchase or their retirement. Once you have a Lifetime ISA, you can continue to contribute until the age of 50.

You can put a maximum of £4,000 into a Lifetime ISA each tax year and are paid a 25% bonus from the Government. The bonus is paid in monthly instalments, and the maximum bonus you can earn in a tax year is £1,000.

The amount you pay in is linked to your annual ISA allowance (£20,000 for 2018/19). For example, if you pay £1,000 into your Lifetime ISA, you can still pay £19,000 into other ISA products. It is possible to hold both a Help to Buy ISA and a Lifetime ISA, but you will not be able to use both bonuses for a first-time house purchase.

Another differentiator between this type of ISA and the Help to Buy ISA is that the proceeds can be used to purchase a property worth up to £450,000 regardless of its location.

Junior ISA
Cash or investments can be wrapped in this ISA on behalf of children under the age of 18. Anyone can invest in the Junior ISA – parents, grandparents or friends. The money belongs to the child, and they can access it when they reach 18 years of age. The Junior ISA has an annual allowance of £4,260 (tax year 2018/19). You must be a UK resident or crown employee to invest in any type of ISA.

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.

Are you making use of unused annual pension allowances?

2018 to 2019 could be the last tax year it may be possible for high earners to use a carry forward allowance of £40k.

If you haven’t contributed your full tax-relieved allowance into your pension for the past three tax years, you could be eligible to top up this year.

Our chartered financial planners are well versed in the ins and outs, so please don’t hesitate to contact us to find out whether you are eligible. The rules can be complicated, to say the least, particularly if you are self-employed.

Turning pensions into money you can use

One of the most important decisions you will make for your future

Under the pension freedoms rules introduced in April 2015, once you reach the age of 55, you can now take your entire pension pot as cash in one go if you wish. However, if you do this, you could end up with a large Income Tax bill and run out of money in retirement. It’s essential to obtain professional advice before you make any major decisions about how to access your pension pot.

Deciding what to do with your pension pot is one of the most important decisions you will make for your future, and now you can access your pension in more ways than ever before. This leaves retirees with different options, from withdrawing lump sums in cash as and when needed to staying invested and drawing income, or to use how they wish. It is still possible to opt for the traditional route of buying an annuity offering a guaranteed income.

As well as understanding the various options for accessing benefits, when you are deciding what to do with your pension pot, you also need to consider your personal financial landscape. How long do you expect your investments and pensions to remain invested for? What do you want to achieve in the future, and how do you see your retirement playing out? How much investment risk are you willing to take? What income sources do you currently have or need to create, and how are they taxed?

Can you afford to retire?

Making the most of the next chapter in life

Pensions can seem complicated, but the basic idea is a simple one. And increasingly, if appropriate, people are turning to private pensions as a tax-effective way to increase their retirement income. Once you’ve decided to start saving for retirement, you need to choose how you’re going to do it. The precise amount you’ll need to save each month to retire at 55 depends entirely on the kind of lifestyle you plan on having in retirement. If appropriate to your particular situation, there are several different types of private pension to choose from. But, in light of recent government changes, the tax aspects require careful planning.

Different pension schemes

The term ‘private pension’ covers both workplace pensions and personal pensions. The UK Government currently places no restrictions on the number of different pension schemes you can be a member of. So, even if you already have a workplace pension, you can have a personal pension too, or even multiple personal pensions.

These can be a useful alternative to workplace pensions if you’re self-employed or not earning, or simply another way to save for retirement. Any UK resident between the ages of 18 and 75 can pay into a personal pension – although the earlier you invest, the more likely you are to be able to build up a substantial pension pot.

Pension-related tax relief

A private pension is designed to be a tax-efficient savings scheme. The Government encourages this kind of saving through tax relief on pension contributions. In the 2018/19 tax year, pension-related tax relief is limited to either 100% of your UK earnings, or £3,600 per annum. If you are a Scottish taxpayer, the tax relief you will be entitled to will be at the Scottish Rate of Income Tax, which may differ from the rest of the UK.

Basic rate taxpayers will receive 20% tax relief on pension contributions. Higher rate taxpayers also receive 20% tax relief, but they can claim back up to an additional 20% through their tax return. Additional rate taxpayers again pay 20% tax relief, but they can claim back up to a further 25% through their tax return. Non-taxpayers receive basic rate tax relief, but the maximum payment they can make is £2,880, to which the Government adds £720 in tax relief, making a total gross contribution of £3,600.

Tapered Annual Allowance

The Annual Allowance is the maximum amount that you can contribute to your pension each year while still receiving tax relief. The current annual allowance is capped at £40,000, but may be lower depending on your personal circumstances.

In April 2016, the Government introduced the tapered annual allowance for high earners, which states that for every £2 of income earned above £150,000 each year, £1 of annual allowance will be forfeited. The maximum reduction will, however, be £30,000 – taking the highest earners’ annual allowance down to £10,000.

Overall tax liability

Any contributions over the annual allowance won’t be eligible for tax relief, and you will need to pay an annual allowance charge. This charge will form part of your overall tax liability for that year, although there is the option to ask your pension scheme to pay the charge from your benefits if it is more than £2,000. It is worth noting that you may be able to carry forward any unused annual allowances from the previous three tax years.

If you have accessed any of your pensions, you can only pay a maximum of £ 4,000 into any un-accessed pension(s) you have. This is called the ‘Money Purchase Annual Allowance’, or ‘MPAA’. The MPAA applies only if you have accessed one of your pensions.

Access your pension

The lifetime allowance is the maximum amount of pension benefit that can be drawn without incurring an additional tax charge. From 6 April 2018, the lifetime allowance increase to £1,030,000.

What counts towards your lifetime allowance depends on the type of pension you have. We will be able to help you determine how much of your lifetime allowance you have already used up. This is important because exceeding the lifetime allowance will result in a charge of 55% on any lump sum, and 25% on any other pension income such as cash withdrawals. This charge will usually be deducted by your pension provider when you access your pension.

Pension protection addition

If you are concerned about exceeding your lifetime allowance, it may be possible to apply for pension protection. This could enable you to retain a larger lifetime allowance and keep paying into your pension, depending on which form of protection you are eligible for.

In addition to pension protection, if you have reached your lifetime allowance or are close to doing so, it may also be worth considering other tax-efficient vehicles for retirement savings, such as Individual Savings Accounts. In the current tax year, individuals can invest up to £20,000 into an Individual Savings Account.

Savings tax-efficiently

The Lifetime Individual Savings Account, launched in April 2017, is open to UK residents aged 18 to 40 and will enable younger savers to invest up to £4,000 a year tax-efficiently. Any savings you put into the Individual Savings Accounts before your 50th birthday will receive an added 25% bonus from the Government. After your 60th birthday, you can take out all the savings tax-efficiently.

Finally, it is worth noting that there will normally be no tax to pay on pension assets passed on to your beneficiaries if you die before the age of 75 and before you take anything from your pension pot, as long as the total assets are less than the lifetime allowance. If you die aged 75 or older, the beneficiary will typically be taxed at their marginal rate.

Remember:

A pension is a long-term investment. The fund may fluctuate and can go down, which would have an impact on the level on 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.

Pension freedoms

Fundamental change in the approach to retirement savings

A revolution in pensions transformed the retirement prospects for millions following the passing of the Pension Schemes Act 2015. April 2019 is the fourth anniversary since the introduction of the pension freedoms, a fundamental change in the approach to retirement savings.

Announced by the then Chancellor, George Osborne, in Budget 2014, pension freedoms gave over-55s full control of their retirement savings. The changes which commenced on 6 April 2015 gave individuals with a defined contribution pension the freedom to access their pension as they wished from age 55. Under these changes, those with a defined contribution pension scheme are no longer required to purchase an annuity.

Income in retirement

With a defined contribution pension, you build up a pot of money that you use to provide an income in retirement. Unlike defined benefit schemes, which promise a specific income when you retire, the income you receive from a defined contribution pension depends on the amount you contribute, how investments perform and the choices you make at retirement to take an income.

At the time of the introduction of pension freedoms, the then Minister for Pensions, Steve Webb, said, ‘The passing of this Act marks the culmination of a five-year pensions revolution under this coalition government. While for years, successive governments simply watched the slow decline of the final salary scheme, we have responded by giving firms new ways of providing their staff with secure pensions.

‘There is a real appetite from employers to offer high-quality pensions for their staff, and the new Defined Ambition pensions made possible by this Act will enable a new generation of better, fairer schemes. The Act also protects the new pension freedoms and flexibilities, so people have control of their pension pots, and know it is a criminal offence for scammers to pretend to offer official Pension Wise guidance.’

Biggest shake-up

To date, the introduction of pension freedoms has been the biggest shake-up of the pensions market and has given individuals control over how to use their retirement savings, but a number of unintended consequences have emerged. Retirement savers have accessed approximately £17.5 billion through pension freedoms since reforms were introduced in April 2015, according to data from HM Revenue and Customs (HMRC). Its report, Flexible payments from pensions: July 2018, also found that the number of individuals who have received flexible payments from their pensions between the second quarter of 2017 and the first quarter of 2018 is 375,000.

This is compared to 393,000 individuals between the second quarter of 2016 and the first quarter of 2017, and 232,000 between the second quarter of 2015 and the first quarter of 2016. Since the introduction of pension freedoms in April 2015, approximately 1 million individuals have accessed their pension for flexible payments.

Between April and June 2018, 574,000 payments were received by 264,000 individuals, totalling £2.3 billion. This compares to 500,000 payments to 222,000 individuals in the first quarter of 2018, at a total of £1.7 billion. From October to December 2017, 454,000 payments were made to 198,000 individuals, totalling £1.5 billion. Between April and June 2017, 435,000 payments were made to 198,000 individuals, amounting to £1.6 billion.

Reforms gathering pace

Previously, most pensioners purchased an annuity with their retirement pot, which paid a guaranteed income for life. The pension freedoms now allow those over the age of 55 access to their savings and give greater flexibility over retirement funding. Despite some isolated cases of pensioners spending their savings on fast cars and other luxuries, figures from HMRC signal that the reforms are gathering pace.

According to Prudential, around one in ten (11%) workers aged over 55 have found pension freedoms have encouraged them to save more since the rules came into effect. In the last three years, this group said they had started saving into a pension for the first time, encouraged their partner to save more, increased pension contributions or restarted pension saving since the introduction of the pension freedoms rules.

According to the research, which surveyed 1,000 UK adults aged over 55 in February 2018, one in eight (12%) expected to work past their original planned retirement date. How your future looks will ultimately be determined by having the right vehicle in place for your retirement.

Taking your money

As you approach retirement and start thinking about when and how to take your money, it’s important to obtain professional advice to check what pensions you have and what they might give you. The rules around pensions are continuously changing, which means receiving regular advice will ensure you’re investing your pension effectively.

The concept of an ‘ageing population’ may feel overused, but the fact is that advances in medicine and generally improving living standards are combining to increase how long we can expect to live. The backdrop to this is a tightening of the welfare state, including the basic State Pension.
Retirement should be the best time of your life, when you can relax and enjoy your life by reaping the benefits of what you earn in so many years of hard work. To keep yourself and your finances in good shape, start planning today. We can help create a clear picture of what you need so that the best is yet to come.

Source data:
The figures are based on data reported to HM Revenue & Customs. Individual numbers are rounded to the nearest 1,000. The yearly individual totals are lower than the sum of the quarterly individual numbers, as some have taken payments in multiple quarters. Reporting was optional up to April 2016, when it was made compulsory. For this reason, figures prior to this are not comprehensive. This may account for part of the increase in reported payments seen in the second quarter of 2016.