Monthly Archives: October 2021

Guarding against rising inflation eating away at your investments

Understanding inflation is an important factor when it comes to investing and your financial success. If you don’t factor inflation in when deciding where to put your money – whether that’s savings accounts or investing – you could and your wealth shrinks over the years. As the post-pandemic recovery takes hold, prices of various goods and services are rising. The recent causes of higher inflation that we’ve been experiencing are largely COVID-related. The easing of lockdowns has boosted consumer confidence and unleashed pent-up demand. At the same time, bottlenecks in production and distribution are squeezing supplies – from building materials to foodstuffs. This supply and demand imbalance has forced up some prices.
Before the pandemic, UK Consumer Prices Index (CPI) inflation rate was around 2% – the rate the Bank of England aims for. However, as with everything else, COVID has played havoc with headline inflation figures. For most of the last year, prices have been rising at a rate of less than 1% a year. However, in June inflation rose to 2.5% (CPI).

GROWING REALISATION
A sustained period of low in&ation may have blunted some people’s
concerns about in&ation. But there’s now a growing realisation that high
inflation could be around the corner, which reduces your purchasing power and what you could buy with your savings over time.
Some investors and savers may underestimate the damaging effects of inflation on their wealth. Keeping money in the bank typically earns interest, but if the interest rate is lower than inflation, money or purchasing power is effectively being lost.

PENSION SAVERS
People on fixed incomes – such as those whose pensions aren’t inflation-linked or workers on a static wage – are especially vulnerable to the effects of inflation. As living costs rise, your money doesn’t go so far.
Pension savers need to think about what their savings might be worth during retirement – o!en a long time into the future.
Inflation can make the difference between an enjoyable retirement
and a frugal, worrisome one.

ABOVE-INFLATION RETURNS
That’s why you should consider mitigating the effects of in&ation by investing at least some of your money in assets that aim to offer
above-in&ation returns.
Arguably, we can expect in&ation to settle back to lower levels once the post-pandemic surge in demand has been sated and supply chains are smoothed out. But even so, with the global economy poised for a strong rebound, most central banks are keen to get back to ‘normal’ monetary conditions. So rock-bottom interest rates can’t last forever.

GOOD INVESTMENT
Bonds and other assets that pay a taxed income and/or a taxed
investment return are especially vulnerable to inflation. Bonds
become less valuable as inflation and interest rates rise, reflected in
falling bond prices and rising yields.
Conversely, shares are generally a good investment during periods of modest inflation. A company’s fortunes typically track consumer demand and economic growth. If demand is strong, companies can raise prices, boosting the profits from which they pay dividends to their share-holders.

TRACK RECORD
Besides shares, there are other assets with a track record of doing well during times of moderate inflation. These include infrastructure assets, where income streams increase as demand grows and the assets mature.
Likewise, gold and other commodities can be useful stores of value to hedge against inflation. So the good news is that it is possible to get an inflation-beating return on your savings, as there are different investment opportunities. However, these involve taking on a little more risk than with a cash savings account.

Looking at different sources to estimate how much income you’ll have

When deciding when to retire, the most important thing to consider is making sure you have enough money to live comfortably.
Imagine you’re retiring today. Will you be able to “nancially support yourself, and potentially your family too, with your current pension savings?
The run-up to your retirement may feel overwhelming, but this is an important time for you and your savings.
So, as you plan for your retirement, you’ll need to look at
different sources to estimate how much income you’ll have.
These include the State Pension, personal or workplace pension schemes, state benefits you may qualify for on retirement and your savings or investments.
Following the pensions reforms, there are now more options available than ever and this has removed the compulsion to purchase an annuity. It also means that you can use your pension fund to benefit your named beneficiaries, whoever they may be.

Basic retirement lifestyle
If you are approaching retirement it’s time to think about what you’re going to do with the money you’ve been working hard to save all these years. The average UK pension pot after a lifetime of saving stands at £61,897.
With current annuity rates, this would buy you an income of only around £3,000 extra per year from age 67, which, added to the maximum State Pension, makes just over £12,000 a year – just enough for a basic retirement lifestyle.
In more recent years, when it’s time to take a retirement income, some people are choosing to do so through pension drawdown. Pension drawdown provides a way to establish a flexible income, set at whatever level you choose, which can be increased or decreased over time to match your needs.

Flexibility and control
For many, this may seem a more “tting solution to their retirement needs than purchasing an annuity, which is a more established option that typically offers a set monthly income for life. However, although pension drawdown offers & flexibility and control, there are differences to consider.
While annuity income is fixed for life, pension drawdown can only continue for as long as you have savings remaining – and once they’re gone, you’ll receive nothing. So, it’s important to receive professional “nancial advice to ensure that you withdraw your money at a rate that will last your expected lifetime.

Will your savings last a lifetime?
It’s important to consider that your retirement could last for 30 years or more, depending on when you retire and how long you live. This is why some people use pension drawdown as the option to provide their retirement income. Your savings remain invested even after you
retire, which means they have the opportunity to continue growing through investment returns.
But it’s impossible to predict exactly how much they will grow each year. Some years they will grow more than others, and some years they may fall in value. If your rate of withdrawal exactly matched your growth rate, your savings could last indefinitely. But, because growth is so hard to
predict, this is near impossible to do.

How much can you safely withdraw?
A 4% withdrawal rate is typically stated as a guide for how much you can withdraw each year from your retirementsavings. This figure is estimated based on the history of the financial markets and how much investments have tended to grow over periods of around 35 years (the expected duration of retirement for someone who retires in their sixties).
So, if you have £500,000 in savings when you retire, 4% would initially equate to £20,000 a year.

However, there are a few additional details that mean
this figure can’t be used totally reliably:
• Past performance of the stock markets cannot reliably
predict future growth
• The performance of investments in your portfolio may be
better or worse than average
• It’s impossible to know for sure how long your retirement
will last
• Your “nancial needs are likely to change over time,
typically peaking in early retirement and then in later life

Changing pensions landscape
So, a 4% rate of withdrawal could be either overly cautious, resulting in the accumulation of wealth that could create an Inheritance Tax liability, or overly reckless, resulting in complete depletion of your savings when you still have years left to live.
In this world of ours, very little stands still. The same can be said for the pensions landscape. As high earners are faced with even more restrictions and potential pitfalls, it is vital to understand the rules and seek professional financial advice.

Pandemic threatens pushing over-50s into pension poverty

The number of those over 55 dipping into their pension early has increased this year, as some have struggled to pay for essentials during the pandemic.

More than half (53%) of people in their 50s fear running out of money in retirement, as they have been the most likely to face job and income losses of any age group during the coronavirus (COVID-19) pandemic (23%), according to a new report.

FINANCES IMPACTED

The number of those over age 55 dipping into their pension early has increased this year, as some have struggled to pay for essentials during the pandemic. The report reveals that one in three people in their 50s (37%) have seen their finances impacted during the pandemic, more than any other age group. Faced with job losses and their pension contributions falling or stopping altogether, 13% now believe they will never be able to afford to give up work. To tide them over, an increasing number of over-55s have been taking advantage of pension freedoms and accessing their retirement savings early. In the first three months of 2021 alone, 383,000 people withdrew money from their pension – a 10% jump on the same period last year.

COMPANY SCHEME

As well as putting their retirement plans in jeopardy, some people may face an unexpected Income Tax bill if they continue saving into a pension after they have withdrawn money from a pension. This could happen for anyone made redundant who then re-joins the workforce and is enrolled into the company scheme. Current rules state that savers can put £40,000 into their pension each year (including employee and employer contributions) and receive tax relief on these savings. Basic rate taxpayers receive 20% pension tax relief and higher rate taxpayers 40% pension tax relief.

LIVING COSTS

However, once someone accesses their pension, no matter how small the amount they take out, Money Purchase Annual Allowance (MPAA) rules mean the amount they can save in a year and still obtain tax relief falls significantly to just £4,000 per year. Anything they pay in over this limit will attract a bill from the taxman. The later middle-aged have not enjoyed the ‘offsetting’ benefits of the pandemic – such as a cut on commuting costs and reduced leisure activity costs – that other age groups have, with only one in six (16%) reporting a decrease in living costs compared to a quarter (25%) of those in their 20s. At the same time, one in five workers (17%) in their 50s are self-employed, compared to only 12% of 25-49-year-olds.

CHALLENGING TIME

With less job security, a lower income on average and well-publicized issues accessing government support, COVID-19 has made it a challenging time to be self-employed. More than half of people who work for themselves have seen their finances suffer, compared to 25% of permanent employees. While we’re right to be worried about the lasting impact of this pandemic on all age groups, those in their 50s need to act urgently to get their savings back on track before retirement, having been forced to use their existing savings just to get by.

As well as putting their retirement plans in jeopardy, some people may face an unexpected Income Tax bill if they continue saving into a pension after they have withdrawn money from a pension.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028). THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE 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. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.

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.