Monthly Archives: November 2020

Getting your pension finances back on track

Do you know how much money you will need in retirement? What about how much you already have saved? Do you know what kind of income that might provide? Unfortunately the answer is ‘no’ for some people.

When thinking about how much you will need to retire comfortably, it’s important to consider the sort of retirement you would like and the annual income you’ll need for your desired lifestyle. You may want to simplify your outgoings, and even downsize in later life.

What are your income sources at retirement?
Your income sources at retirement should be clearly outlined before you start the process of retirement planning. Do you know exactly how many pension pots you have, and how much they’re worth? Sources of income may include multiple personal pensions, historic employer pensions, savings, income from property or dividends, and the State Pension, once it becomes accessible.

Make sure to fully use your tax allowances, which is key to maximising your retirement income. Most people can contribute up to £40,000 tax-free to their pensions annually. From 6 April 2020, the annual allowance taper figures were adjusted to give a higher threshold level. The maximum reduction is £36,000, meaning that someone with adjusted income of over £312,000 has an annual allowance of £4,000.

Have you fully used your allowances from the previous years?
One way of mitigating any shortfall is by using pension carry forward, which allows you to carry forward any unused annual allowances going back up to three years. Therefore, you should check if you fully used allowances from the previous years so that you can receive the tax-free allowance.
Ensure that you start by assessing the previous tax years and including the total value you contributed to pensions, any contributions from your employer and the amount of tax relief HM Revenue & Customs gave you.

How can you improve your retirement journey?
1. Find lost pensions – If you’ve had a number of different employers, then you have probably had a number of different pension pots. Most pension schemes of which you’ve been a member must send you a statement each year. These statements include an estimate of the retirement income that the pension pot might generate when you reach retirement. Alternatively, you can visit https://www.gov.uk/find-pension-contact-details to find contact details to search for a lost pension.

2. Work out what you need for your retirement – People have different suggestions for ways to work out how much they will need as an income in later life, but you know best what your costs are now and what they are likely to be in retirement. Think about what bills you will no longer have – no commuting costs, perhaps you will own your home outright, for example. And think about the bills that won’t change and the budget you want for travel and leisure. Calculate your likely costs and you should have a good idea of what level of income to aim for.

3. Check your State Pension age – Don’t forget that you will be entitled to State Pension as long as you have made the required number of National Insurance contributions. The age at which most people start to receive the State Pension has now increased to age 66. Men and women born between 6 October 1954 and 5 April 1960 start receiving their pension on their 66th birthday. For those born after that, there will be a phased increase in State Pension age to 67, and eventually 68.

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

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

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

A PENSION IS A LONG-TERM INVESTMENT.

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

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.

Savers holding onto extra cash during the COVID-19 pandemic

Some savers are putting their hard-earned money at risk by holding too much on deposit. Savers holding onto extra cash during the coronavirus (COVID-19) pandemic need to consider their long-term investment options, as new data shows the savings ratio for some people has increased during the pandemic.

Figures published by the Office for National Statistics (ONS) show that the savings ratio as a total, which measures the amount of surplus cash households have, has increased during this period. As a result, some households have been able to increase their cash deposits during the pandemic due to a combination of lower discretionary spending during lockdown and households consciously putting more into cash reserves.

Exposed to the risk of inflation

But cash is the investment type most exposed to the risk of inflation. Over the longer term it tends to underperform ‘real assets’ like stocks and shares. Inflation is a very powerful destructive force and understanding inflation is an important factor when it comes to financial success. Over time, inflation can reduce the value of your savings, because prices typically go up in the future.

According to the ONS, in Quarter 2 (Apr to June) household spending (adjusted for inflation) growth was negative 23.6% compared with Quarter 1 (Jan to Mar)[1]. The largest negative contribution to growth was from restaurants and hotels, which fell by negative 89.4% compared with Quarter 1.

Households holding onto more cash

The largest positive contribution to growth was from food and non-alcoholic beverages, which increased by positive 3.5% compared with Quarter 1. These ONS figures are also consistent with the Bank of England’s estimates that the deposits in household bank accounts grew £17bn a month from March to June, more than triple the rate seen in the previous six months.

But as some households are able to hold onto more cash, many have received underwhelming rates of return on their cash savings. National Savings & Investments (NS&I) recently reduced rates on its savings products, while other cash accounts offer relatively modest returns.

Emergency cash

A cash savings buffer is key as it provides protection in the event of a loss of income. This means you have something to break your fall and avoid short-term borrowing to cover day-to-day costs. It is normally recommended that households keep enough cash on hand to cover between 3 to 6 months of essential spending. This money should be held in an easily accessible account, although this typically means accepting little or no interest.

Cash savings

Once you have enough to cover a financial emergency, it is important to start to make some of that money work harder. Locking money up in a deposit account can help savers to achieve a modest return, although rates on cash remain very low.

Stocks & shares

Over longer periods of time, historically the stock market has performed well. There have been and will continue to be plenty of bumps and bruises along the way, but the overall trend has been upwards
Investing can deliver better long-term returns, but markets go up and down over time and past performance is not guaranteed, so it is important when investing to leave the money untouched for several years. One of the most efficient ways to invest is through a Stocks & Shares Individual Savings Account (ISA). This offers tax-efficient growth and every adult can invest up to £20,000 during every tax year, which runs from 6 April to 5 April the following year.

If you have built up a lump sum, this could be invested into an ISA account in one go; however, depending on your particular situation, it may be appropriate to gradually invest in funds or stocks over a period of several months. This process, known as ‘pound cost averaging’, helps to ensure you smooth your investments and don’t invest all your savings at a peak in the market.

Lifetime ISA (LISA)

Another form of ISA account, the LISA, offers a savings boost from the Government. This is only allocated to those who use the money to purchase a first home or do not access it until they turn age 60. So it is predominantly aimed at first-time buyers, or people who have maximised their pension contribution allowance. If you withdraw it for any other reason, then a penalty applies.

Pensions

Saving into a pension fund attracts pension tax relief, rewarding savers with a 20% or 40% top-up for basic and higher-rate taxpayers respectively. Strict penalties apply on withdrawals before age 55, but for those who want to commit money towards their future this is a very tax-efficient way to invest for the long term.

Those people in employment who are eligible to be auto-enrolled into a pension should already have regular contributions to their retirement fund being made through their salary. If they have extra disposable income they may want to consider paying more into their pension.

Some workplace schemes may not be able to facilitate this, in which case a personal pension provider can receive contributions. Normally 20% tax relief will be applied and higher-rate taxpayers may need to recover additional tax relief via their tax return.

Source data:
[1] https://www.ons.gov.uk/economy/nationalaccounts/satelliteaccounts/datasets/

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