Excuses to avoid facing the difficult work of saving for retirement

Retirement is one of our biggest financial challenges. As with any daunting challenges we face, we tend to think up excuses so we can avoid facing the difficult work of saving for retirement. Worryingly, nearly one in eight people retiring this year (12%) have made no provision for their retirement, including 10% who will either be totally or somewhat reliant on the State Pension, according to new research[1].

This leaves some retirees starting their retirement with an income of just £1,452 a year, below the Joseph Rowntree Foundation’s (JRF) Minimum Income Standard for a single pensioner[2]. But neither panicking nor putting off the matter will solve the problem. For those people that have a shortfall in their retirement savings, there are many immediate steps that can and should be taken. If you have any concerns about your retirement provision, we can help you look at the different options available to you.

Planning to retire without a pension
There is good news, as the numbers retiring without a pension is lower than the 14% in 2017, and now nearly half the 23% recorded in 2008. Women are more likely to have no retirement savings – 18% will retire without a pension this year, compared with 7% of men. The gap is narrowing over time – in 2016, 22% per of women had no retirement savings, compared with 7% of men, while in 2008, a third of women (32%) were planning to retire without a pension.

An acceptable standard of living
A tenth (10%) of those retiring in 2018 will either rely somewhat or solely on the State Pension, which for those retiring after April this year will mean an income of £164.35 a week[2], or just over £8,500 a year. Taking the JRF’s Minimum Income Standard of £192.27 a week for a single pensioner, which is a benchmark of the income required to support an acceptable standard of living[3], those relying on the State Pension will fall short of the minimum standard by £27.92 a week, or £1,452 a year.

Significance of the State Pension
The research highlights the significance of the State Pension to people in retirement, including those with pension savings of their own. On average, people expecting to retire this year estimate that the State Pension will account for more than a third (33%) of their income in retirement.
Of those retiring in 2018 who do have a pension of their own, two fifths (42%) have the majority of their pension in a workplace final salary scheme, one in eight (13%) have their savings in a personal pension which is not through their employer, and 12% have the majority in a workplace defined contribution scheme.

Source data:
[1] Research Plus conducted an independent online survey for Prudential between 29 November and 11 December 2017 among 9.896 non-retired UK adults aged 45+, including 1,000 planning to retire in 2018.
[2] Benefit and pension rates 2018-2019 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/662290/proposed-benefit-and-pension-rates-2018-to-2019.pdf
[3] Figures taken from the 2017 update of the Minimum Income Standard for the United
Kingdom published by the Joseph Rowntree Foundation – https://www.jrf.org.uk/report/minimum-income-standard-uk-2017

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.

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.

Larger individual wealth and expectation of substantial inheritances

Put simply, Inheritance Tax is a tax charged on your estate when you die. The Government set a tax-free allowance called the ‘nil-rate band’, which is currently £325,000. Any amount above this level is taxed at 40%. Your estate is the value of everything you own, such as your house, car, investments, life assurance policies and the contents of your home.

UK’s massive wealth increase
One person in 25 expect to become ‘million-heirs’ and inherit an estate worth £1 million or more, according to Canada Life’s [1] annual Inheritance Tax Monitor survey of people over 45. Around one person in 50 expects to inherit more than £5 million.

The figures reveal the financial impact of the UK’s massive wealth increase in recent decades, with rising stock markets and increased property values contributing to larger individual wealth and the expectation of substantial inheritances.

Lack of knowledge around the rules
However, without financial planning, much of the estate is likely to be lost in Inheritance Tax for assets above the available nil-rate band threshold. On an estate worth £1 million, over one fifth (£230,000) would be lost in Inheritance Tax, or roughly the equivalent of an average UK house price.
Compounding the problem is the lack of knowledge around the Inheritance Tax rules. The majority of people (70%) could not identify the standard nil-rate tax threshold (£325,000). Meanwhile, only one in 20 of those surveyed knew about the residence nil-rate band tapering for estates over £2 million, likely leading to greater tax bills for larger inheritances.

Substantial amounts of money lost in tax
People’s expectations are likely to be substantially wrong without financial planning, and it’s quite likely they could lose substantial amounts of money in tax. Yet it’s quite possible to ensure that by using a straightforward trust, the entire amount goes where it is intended – the beneficiaries.
There are several straightforward ways to reduce the amount of Inheritance Tax that is due. And for people expecting around £500,000 or more in inheritance, there is still a danger of losing tens of thousands of pounds in tax. The risk of a big Inheritance Tax bill drops to zero at the Inheritance Tax threshold of £325,000, below which there is no tax.

Source data:
[1] Survey of 1,001 UK consumers aged 45 or over with total assets exceeding the standard inheritance nil-rate band of £325,000. Carried out in October 2017. Percentages may not add up to 100 due to rounding or multiple answer questions. Research conducted by Atomik.

Time to take a tax wealth check?

Now that we’ve entered the 2018/19 tax year, a number of key changes have taken place to existing policies, along with some newly introduced initiatives. It’s important to consider these tax implications when making financial decisions.

The key changes to existing policies and newly introduced initiatives

To help you navigate your way through the main changes that could have an impact on your financial situation, we’ve provided a summary of the main 2018/19 tax year changes that have come into force. The good news is that the overall tax burden is little changed for basic-rate taxpayers, but there are a number of areas that have changed that should be taken note of.

Taking action at the start of the 2018/19 tax year may give you the opportunity to take advantage of appropriate reliefs, allowances and exemptions, and consider whether there are any relevant decisions that you need to make sooner rather than later.

Here’s what you need to know about the 2018/19 tax year changes and new initiatives.

Personal Allowance

The tax-free Personal Allowance is the amount of income you can earn before you have to start paying Income Tax. All individuals are entitled to the same Personal Allowance, regardless of their date of birth.

In the 2017/18 tax year, the Personal Allowance was £11,500, and it rises to £11,850 in the 2018/19 tax year. This means you can earn £350 more in the 2018/19 tax year than in the previous tax year before you start paying Income Tax.

However, bear in mind that the Personal Allowance is restricted by £1 for every £2 of an individual’s adjusted net income above £100,000.

A spouse or registered civil partner who isn’t liable to Income Tax above the basic rate may transfer £1,185 of their unused Personal Allowance in the 2018/19 tax year, compared to £1,150 in the 2017/18 tax year to their spouse or registered civil partner, as long as the recipient isn’t liable to Income Tax above the basic rate.

Income Tax

The starting point for paying 20% basic-rate tax is £11,850, while 40% tax will start on earnings above £46,350 (up from £45,000).

Scotland

In Scotland, the first £2,000 of earnings after the Personal Allowance is taxed at 19% rather than 20%. After that, it’s 20% tax until your earnings hit £24,000, when it rises to 21%, then above £43,430 the rate is 41%. Both have an upper rate above £150,000; in England it’s 45%, in Scotland 46%.

Higher-rate threshold

The threshold for people paying the higher rate of Income Tax (which is 40%) increased from £45,000 to £46,350 in the 2018/19 tax year. This new figure also includes the increased Personal Allowance. The Government has already committed to raising the higher-rate threshold to £50,000 by 2020.

Dividend Allowance

The Chancellor of the Exchequer, Philip Hammond, announced in the Spring Budget 2017 that the Dividend Allowance would reduce from £5,000 to £2,000 from 5 April 2018.

Any dividend income that investors earn above the £2,000 allowance will attract tax at 7.5% for basic-rate taxpayers, while higherrate taxpayers will be taxed at 32.5%, and additional-rate taxpayers at 38.1%.

This may impact on shareholders of private companies paying themselves in the form of dividends, for example, rather than salary. Investors with portfolios that produce an income in the form of dividends of more than £2,000 a year, which are held outside ISA or pensions, will also be affected by the reduction in the allowance.

National Insurance Contributions

Will be charged at 12% of income on earnings above £8,424, up from £8,164 until you are earning more than £46,350, after which the rate drops to 2%. It’s the same in Scotland.

Auto enrolment contributions

Auto enrolment contribution rates have increased for employees and employers. In the previous 2017/18 tax year, the minimum pension contribution rate was 1% from the employee and 1% from the employer, which provides a 2% contribution. However, from 6 April 2018, the contribution rate increased to 3% for employees and 2% from the employer, totalling 5%.

Pension Lifetime Allowance

The Lifetime Allowance increased from £1 million to £1.03 million in the 2018/19 tax year. This is the maximum total amount you can hold within all your pension savings without having to pay extra tax when you withdraw money from them.

If the total value of your pension savings goes over the Lifetime Allowance, any excess will be taxed at a rate of 25% in addition to your marginal rate of Income Tax if drawn as income, or 55% if you take it as a lump sum.

State Pension

There has been a 3% rise for the old basic State Pension and the new flat-rate State Pension. If you’re on the basic State Pension (previously £122.30 per week), this has increased to £125.95. The flat-rate State Pension has increased from £159.55 to £164.35 a week.

Inheritance Tax

The residence nil-rate band (RNRB) has risen from £100,000 to £125,000. The RNRB enables eligible people to pass on a property to direct descendants and potentially save on death duties.

Capital Gains Tax

Capital Gains Tax is charged on profits that are made when certain assets are either transferred or sold. There’s no tax to pay if all gains made in a tax year fall within the annual Capital Gains Tax allowance. For the 2018/19 tax year, this is £11,700 (it was £11,300 for the 2017/18 tax year).

Buy-to-let landlords

Changes mean that only 50% of mortgage interest will be able to be offset when calculating a tax bill, compared with 75% previously.

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

The bank that likes to say ‘yes’

Forget the Lamborghini – 2.4 million UK grandparents[1] have either raided their pension to support their grandchildren or plan to in the future. According to research from LV=, a quarter of generous grandparents (25%) who have already given away money to their grandchildren[2] have taken the funds from their pension. A further one in six (16%) plan to use their pension for this reason once they reach retirement age.

Substantial amounts
Open-handed grandparents are willing to give away substantial amounts to their grandchildren, whether from their pensions, savings or wages, with the average grandparent having already spent £1,633. More than one in 20 (6%) have given gifts of more than £10,000.

The generosity shows no sign of stopping, with many grandparents (56%) planning to give away even more money in future. The average grandparent expects to give away £2,938 in the coming years, with charitable grandmas expecting to give away £173 more than grandads on average.

Living inheritance
Pension savings are used to help with a wide range of things, from helping grandchildren get on the housing ladder (21%) and other high-ticket items like university fees (20%) or cars (17%). A similar number would help out with more day-to-day expenses like bills (21%) and hobbies (19%).

Grandparents often view the financial gifts they make as a ‘living inheritance’, with more than a third (37%) wanting to be around to see their grandchildren enjoy the money[3].

Retirement focus
Its heart-warming to see grandparents so willing to help out their grandchildren both day-to-day and with large ticket purchases. With one in five using their pension to help out, it’s important these kind individuals plan for their retirement and have enough money left for themselves, as even smaller outgoings like bills can become harder to meet later in life, as well as the flexibility to access it.

The generosity of grandparents in Britain is clear to see, and it is great that so many feel comfortable enough to be able to help out their family and plan to continue doing so. However, the average retirement is now much longer than past generations, and people’s lifestyle and associated costs are likely to change over this period.

Source data:
[1] According to ONS Population Pyramid, there are 49,533,900 people aged over 18 in the UK. The research found that 39% of a sample of 2,002 adults were grandparents, indicating there are 19,318,221 grandparents in the UK. 56% of grandparents have helped or plan to help their grandchildren, and 22% of these would use their pension to do so. Therefore, 2.38 million grandparents have helped or plan to help their grandchildren, using their pension.
[2] According to research carried out by Opinium Research on behalf of LV=, 25% of grandparents have already taken money from their pension to give to their grandchildren.
[3] Statistics from research carried out on behalf of LV= by Opinium Research in June 2014 (total sample size = 2043). The press release for this research was issued on 20 June 2014.
The research was carried out by Opinium Research from 13–16 October 2015. The total sample size was 786 British grandparents over the age of 30, and the survey was conducted online. Results are weighted to a nationally representative criteria.

Annual and lifetime limits

When it comes to managing money, one of the things some people find most difficult to understand is the tax relief they receive on payments into their pension. Tax relief means some of your money that would have gone to the Government as tax goes into your pension instead. You can put as much as you want into your pension, but there are annual and lifetime limits on how much tax relief you get on your pension contributions.

TAX RELIEF ON YOUR ANNUAL PENSION CONTRIBUTIONS

If you’re a UK taxpayer, in the tax year 2018/19 the standard rule is that you’ll receive tax relief on pension contributions of up to 100% of your earnings or a £40,000 annual allowance, whichever is lower. Any contributions you make over this limit will be subject to Income Tax at the highest rate you pay. However, you can carry forward unused allowances from the previous three years, as long as you were a member of a pension scheme during those years.

But there is an exception to this standard rule. If you have a defined contribution pension and you start to draw money from it, the annual allowance is reduced by £1 for every £2 income where adjusted income exceeds £150,000.

THE MONEY PURCHASE ANNUAL ALLOWANCE (MPAA)

In the tax year 2018/19, if you start to take money from your defined contribution pension, this can trigger a lower annual allowance of £4,000. This is known as the ‘Money Purchase Annual Allowance’ (MPAA). That means you’ll only receive tax relief on pension contributions of up to 100% of your earnings or £4,000, whichever is the lower.

Whether the lower £4,000 annual allowance applies depends on how you access your pension pot, and there are some complicated rules around this.

The main situations when you’ll trigger the MPAA are:

• If you start to take ad-hoc lump sums from your pension pot
• If you put your pension pot money into an income drawdown fund and start to take income

The MPAA will not be triggered if you take:

• A tax-free cash lump sum and buy an annuity (an insurance product that gives you a guaranteed income for life)
• A tax-free cash lump sum and put your pension pot into an income drawdown product but don’t take any income from it

You can’t carry over any unused MPAA to another tax year.

The lower annual allowance of £4,000 only applies to contributions to defined contribution pensions and not defined benefit pension schemes.

TAX RELIEF IF YOU’RE A NONTAXPAYER

If you’re not earning enough to pay Income Tax, you’ll still qualify to have tax relief added to your contributions up to a certain amount.

The maximum you can pay is £2,880 a year or 100% of your earnings – subject to your annual allowance.

Tax relief is added to your contribution, so if you pay £2,880, a total of £3,600 a year will be paid into your pension scheme, even if you earn less than this.

HOW MUCH CAN YOU BUILD UP IN YOUR PENSION?

A pension lifetime allowance puts a top limit on the value of pension benefits that you can receive without having to pay a tax charge.

The pension lifetime allowance is £1,030,000 for the tax year 2018/19. Any amount above this is subject to a tax charge of 25% if paid as pension, or 55% if paid as a lump sum.

WORKPLACE PENSIONS, AUTOMATIC ENROLMENT AND TAX RELIEF

Since October 2012, a system has being gradually phased in requiring employers to automatically enrol all eligible workers into a workplace pension.

It requires a minimum total contribution, made up of the employer’s contribution, the worker’s contribution and the tax relief.

Reducing the amount of money beneficiaries have to pay

IHT is usually payable on death. When a person dies, their assets form their estate. Any part of an estate that is left to a spouse or registered civil partner will be exempt from IHT. The exception is if a spouse or registered civil partner is domiciled outside the UK. The maximum a person can give them before IHT may need to be paid is £325,000. Unmarried partners, no matter how long-standing, have no automatic rights under the IHT rules. However, there are steps people can take to reduce the amount of money their beneficiaries have to pay if IHT affects them.

Where a person’s estate is left to someone other than a spouse or registered civil partner (i.e. to a non-exempt beneficiary), IHT will be payable on the amount that exceeds the £325,000 nil-rate threshold. The threshold usually rises each year but is currently frozen at £325,000 until the tax year 2020/21.

IHT is payable at 40% on the amount exceeding the threshold

Every individual is entitled to a nil-rate band (that is, every individual is entitled to leave an amount of their estate up to the value of the nil-rate threshold to a non-exempt beneficiary without incurring IHT). If a widow or widower of the deceased spouse has not used their entire nil-rate band, the nil-rate band applicable at the time of death can be increased by the percentage of the nil-rate band unused on the death of the deceased spouse, provided the executors make the necessary elections within two years of your death.

To calculate the total amount of IHT payable on a person’s death, gifts made during their lifetime that are not exempt transfers must also be taken into account. Where the total amount of non-exempt gifts made within seven years of death plus the value of the element of the estate left to non-exempt beneficiaries exceeds the nil-rate threshold, IHT is payable at 40% on the amount exceeding the threshold.

Certain gifts made could qualify for taper relief

This percentage reduces to 36% if the estate qualifies for a reduced rate as a result of a charity bequest. In some circumstances, IHT can also become payable on the lifetime gifts themselves – although gifts made between three and seven years before death could qualify for taper relief, which reduces the amount of IHT payable.

From 6 April 2017, an IHT residence nilrate band was introduced in addition to the standard nil-rate band. It’s worth up to £100,000 for 2017/18, £125,000 for 2018/19, £150,000 for 2018/20 and £175,000 for 2020/21. It starts to be tapered away if an IHT estate is worth more than £2 million on death. Unlike the standard nil-rate band, it’s only available for transfers on death. It’s normally available if a person leaves a residential property that they’ve occupied as their home outright to direct descendants.

Property, land or certain types of shares where IHT is due

It might also apply if the person sold their home or downsized from 8 July 2015 onwards. If spouses or registered civil partners don’t use the residence nil-rate band on first death – even if this was before 6 April 2017 – there are transferability options on the second death.

Executors or legal personal representatives typically have six months from the end of the month of death to pay any IHT due. The estate can’t pay out to the beneficiaries until this is done. The exception is any property, land or certain types of shares where the IHT can be paid in instalments. Beneficiaries then have up to ten years to pay the tax owing, plus interest.