Posts By: DG Financial

Now is the time to make sure you know how much you need to save.

As you enter your 50s, retirement looms larger on the horizon, making it crucial to ensure your finances are optimally positioned. This stage of life demands a coordinated and joined-up approach to financial planning to enjoy retirement on your terms. An essential step is to clarify your retirement goals.

While saving for retirement might have been a long-standing objective, now is the time to know how much you need to save. This target will depend on when you plan to retire, your retirement lifestyle aspirations and factors like projected investment growth and inflation.

REVIEWING YOUR INVESTMENT PORTFOLIO

With retirement approaching, assessing whether your investment portfolio effectively balances risk and reward is vital. The appropriate level of investment risk varies based on your retirement funding strategy and timeline. If you’re considering purchasing an annuity, progressively shifting your pension fund from stocks to lower-risk assets, such as cash, can safeguard against market volatility.

Conversely, if your retirement strategy involves income drawdown or other investments, maintaining exposure to equities can support long-term growth, shielding your savings from inflation’s erosive effects.

FOCUSING ON PENSION CONTRIBUTIONS

Pensions are highly effective retirement savings vehicles, particularly in your 50s, due to the tax relief on contributions. In the current 2024/25 tax year, for basic rate taxpayers, a £1,000 pension contribution effectively costs £800, while higher rate taxpayers pay £600, and additional rate taxpayers pay £550, assuming the full gross contribution is matched by income taxed at those levels. This tax relief acts as a government- subsidised boost to your retirement fund.

Most individuals can contribute up to 100% of their UK relevant earnings or £60,000 less any employer contributions plus any carry forward (2024/25 tax year) while benefiting from tax relief up to age 75. If your income is very high, your pension annual allowance might be lower, but unused allowances from the previous three years may be able to be utilised under carry-forward rules.

MAXIMISING TAX ALLOWANCES

Beyond pensions, several tax allowances can enhance your investment strategy. You can invest up to £20,000 a year (2024/25 tax year) into Individual Savings Accounts (ISAs), securing tax-efficient growth and withdrawals. This flexibility benefits those retiring before age 55, providing a valuable income source.

Other allowances include the personal savings allowance, dividend allowance and Capital Gains Tax exemption, allowing for tax-free interest, dividends and gains within specific limits. We can assist in optimising these allowances to ensure your portfolio is structured for maximum tax efficiency.

IMPORTANCE OF PROFESSIONAL GUIDANCE

The investment choices you make in your 50s can significantly influence your retirement lifestyle. While there’s still time to fortify your savings, missteps can derail your plans. Professional financial advice is invaluable in navigating these challenges. We’ll evaluate whether your portfolio aligns with your goals and ascertain if you’re on track for the retirement you envision.

 WILL YOU SECURE A FULFILLING AND FINANCIALLY STABLE RETIREMENT?

Contact us today for tailored advice that accommodates your unique circumstances and aspirations. Let us help you secure a fulfilling and financially stable retirement. We look forward to hearing from you.

THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).

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 VALUE OF YOUR INVESTMENTS CAN GO DOWN AS WELL AS UP, AND YOU MAY GET BACK LESS THAN YOU INVESTED.

THE TAX TREATMENT IS DEPENDENT ON INDIVIDUAL CIRCUMSTANCES AND MAY BE SUBJECT TO CHANGE IN FUTURE.

ALIGNING INVESTMENTS WITH RISK TOLERANCE AND CAPACITY

Investing is an indispensable tool for building wealth and achieving financial goals. By allocating resources to various investments, individuals can accumulate wealth over time through capital appreciation, dividends and interest. For example, investing in a diversified portfolio of stocks can yield significant returns, enabling you to grow your wealth far beyond what traditional savings accounts offer.

Additionally, investments can provide a passive income stream, helping to fund major life events such as buying a home, funding education or enjoying a comfortable retirement. The power of compounding returns further amplifies the benefits of investing, as the earnings on your investments generate their earnings over time.

However, it is crucial to understand the concepts of risk tolerance and risk capacity to make informed investment decisions. Properly balancing your investment strategy with your risk profile can significantly impact your financial success and peace of mind, helping you navigate the complexities of the financial markets more effectively and confidently.

UNDERSTANDING RISK TOLERANCE

Risk tolerance refers to an investor’s willingness and ability to endure market volatility and potential losses. It measures your comfort level with investing in assets that may fluctuate in value. Factors influencing risk tolerance include your personality, past investment experiences and financial goals.

For example, if you are comfortable taking risks, you might prefer investments offering higher potential returns, understanding that these come with greater volatility. Conversely, if you are risk-averse, you would likely choose safer investments, even if they offer lower returns.

Understanding your risk tolerance is crucial before you begin investing. Ask yourself questions like: How comfortable are you with market volatility? How might you react if your investments decrease in value? Are you someone who embraces investment risk for greater opportunities, or are you more risk- averse and likely to worry when the market dips?

DEFINING RISK CAPACITY

Unlike risk tolerance, risk capacity is not based on your emotional comfort with risk. Instead, it pertains to how much risk you can afford to take, given your financial situation, investment time horizon and life stage.

Risk capacity considers practical aspects like your income, savings, liabilities and the time frame for achieving your financial goals. For instance, a young professional with a steady income and decades before retirement may have a higher risk capacity than someone nearing retirement who cannot afford significant portfolio losses.

THE IMPORTANCE OF ALIGNING INVESTMENTS

Aligning your investments with risk tolerance and capacity is critical for several reasons. First, it helps ensure that you do not take on more risk than you can handle emotionally or financially. Second, it prevents you from being overly conservative, which might hinder your ability to grow your wealth sufficiently to meet your financial goals.

PRACTICAL TIPS FOR ASSESSING RISK TOLERANCE AND CAPACITY

Self-assessment: Reflect on your past reactions to financial losses. How did you feel and respond? Consider your long-term financial goals and how much volatility you will endure to achieve them.

Financial review: Evaluate your current financial situation, including your income, savings, debts and future financial needs. Determine how much loss you can afford without jeopardising your financial security.

Time horizon: Assess the time you have to invest. Longer time horizons generally allow for taking on more risk, as there is more time to recover from potential losses.

Risk tolerance questionnaire: We can help assess your risk tolerance and provide insights into your comfort level with different types of investments.

CHOOSING INVESTMENTS

Once you understand your risk tolerance and capacity, we can advise on the appropriate investments that align with these factors.

HERE ARE SOME OPTIONS:

For high-risk tolerance and capacity: Equities, growth stocks and exchange-traded funds (ETFs). These investments offer higher potential returns but come with increased volatility.

For moderate risk tolerance and capacity: Balanced portfolios with a mix of stocks and bonds can provide a good balance of growth and stability.

For low-risk tolerance and capacity: Conservative investments such as government bonds, blue-chip stocks and high-quality fixed-income securities. These options offer lower returns but are less volatile.

ALIGNING INVESTMENTS WITH RISK TOLERANCE AND CAPACITY

It’s essential to align your investments with both your risk tolerance and risk capacity. Failing to do so may result in taking on more risk than you can afford or being overly cautious, causing your savings to grow too slowly. Both scenarios could hinder your ability to reach your financial goals.

Understanding your unique approach to risk and how it impacts you is vital.

Additionally, aligning your investments with your risk tolerance and capacity is essential for achieving your inancial goals while maintaining peace of mind. By assessing these factors and choosing appropriate investments, you can more effectively navigate the complexities of the financial markets.

 READY TO TAKE CONTROL OF YOUR FINANCIAL FUTURE?

We’ll listen to your plans and goals and create an investment strategy tailored to your unique risk profile and financial situation. To discuss your investment requirements – please get in touch with us.

THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

THE VALUE OF YOUR INVESTMENTS CAN GO DOWN AS WELL AS UP, AND YOU MAY GET BACK LESS THAN YOU INVESTED.

THE TAX TREATMENT IS DEPENDENT ON INDIVIDUAL CIRCUMSTANCES AND MAY BE SUBJECT TO CHANGE IN FUTURE.

ESSENTIAL TIPS FOR MOTHERS BALANCING FAMILY AND FINANCES

Balancing the many responsibilities of motherhood can be overwhelming, often pushing long-term financial planning onto the back burner. However, effective financial planning is essential for everyone, and as a mother, you face unique challenges that require extra attention. Here are some key financial planning steps to help you take control and secure your family’s future.

SAVE FOR UNFORESEEN EMERGENCIES

As a mother, you’ve probably realised that emergencies can strike when you least expect them to. While an emergency savings pot can’t prevent sick days, uniform mishaps or broken friendships, it can provide a useful financial buffer for more expensive emergencies, such as boiler or car breakdowns. Building up at least six months’ worth of essential expenditure in an easy-access savings account reduces the risk of falling into debt or dipping into savings allocated for long-term goals.

PROTECTION, PROTECTION, PROTECTION

An income protection policy should be considered if your family relies on your income to cover bills, childcare, school fees or after- school activities. This type of insurance pays out a portion of your salary if you suffer from a long-term illness and cannot work, helping you maintain financial stability and ensuring your children’s lifestyle isn’t unduly affected.

Life insurance is another essential protection, offering a vital financial safety net should the worst happen to you. It provides a lump sum or regular income if you pass away during the policy term, which could help pay off the mortgage and ease the financial burden on your family.

YOUR PENSION MATTERS

If you’ve taken time off work to care for your children, finding ways to top up your pension savings is crucial. Many mothers prioritise their children’s futures over their own, but neglecting your pension can have long-term financial repercussions that ultimately affect your entire family. The good news is that there’s still ample time to get your pension back on track.

If you qualify for the full amount of the new State Pension, you will receive £221.20 per week, or £11,502.40 a year (2024/25). You must have paid National Insurance (NI) contributions for 35 years to qualify for the maximum amount. If you’re not working, you’ll receive NI credits automatically as long as you claim Child Benefit, and your child is under 12. You may still receive these credits if you’ve claimed child benefits but opted out of payments to avoid the High-Income Child Benefit charge.

 TOPPING UP PENSIONS 

Consider topping up your workplace or private pensions. Pensions are a highly cost-effective way of saving for retirement due to the tax relief you receive on personal pension contributions. This means a £100 pension contribution will only cost you £80 if you’re a basic rate taxpayer, £60 if you’re a higher rate taxpayer or £55 if you’re an additional rate taxpayer, as long as the total gross contributions are matched by the income in that band.

Even if you aren’t working, you can contribute up to £2,880 per year into a pension and still receive 20% tax relief, boosting your contribution to £3,600. If you receive any cash gifts or inherit some money, saving it into a pension can significantly enhance your retirement funds.

WEALTH CREATION FOR YOUR CHILDREN

If financially feasible, saving money for your children can profoundly impact their future, potentially helping with university fees or securing a deposit for their first home. To maximise the growth potential of their money, consider investing in the stock market.

Although mothers might naturally lean towards being risk-averse, history shows that, over long periods, the stock market generally outperforms cash. A Junior ISA is a starting point. It offers tax- efficient investment growth and locks away funds until your child’s 18th birthday.

OBTAIN PROFESSIONAL FINANCIAL ADVICE

You might not have the time or inclination to sort out your inances independently – and that’s perfectly ine. Financial matters are one area where entrusting the responsibility to a professional can be done guilt-free.

Obtaining professional financial advice can instil coinidence that you’ve made the right decisions with your money, allowing you to focus on yourself and your family.

 WANT TO FIND OUT INFORMATION 

OR SEE HOW WE CAN HELP WITH PERSONALISED FINANCIAL GUIDANCE?

Contact us today for expert professional advice and personalised financial guidance. We’re here to help you and your family achieve financial stability and peace  of mind. Don’t wait – contact us now, and let’s secure a brighter future together!

THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).

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

Should you consider estate planning and gifting for future generations.

As we age or accumulate more wealth, protecting and preserving our assets for future generations becomes increasingly essential. This process, known as Inheritance Tax (IHT) planning, estate planning or intergenerational wealth planning, involves strategically managing your estate to minimise tax liabilities and ensure that your wealth is passed down to your loved ones in the most tax-efficient manner possible.

Effective planning can significantly impact the financial wellbeing of your heirs, making it crucial to consider various strategies and tools available for safeguarding your estate.

One common question we receive from clients is whether to gift assets during their lifetime or wait until they have passed away. The answer is more complex and heavily depends on your personal and financial circumstances and objectives. Gifting can provide immediate support to family members and potentially reduce your estate’s size, lowering the IHT burden.

However, careful consideration must be given to the gifts’ timing, amount and recipients to ensure that they align with your long-term goals and comply with tax regulations. Understanding these nuances is essential in making informed decisions that will benefit you and your loved ones.

UNDERSTANDING INHERITANCE TAX

When you pass away, IHT is potentially payable to HM Revenue & Customs (HMRC). The amount due depends on the estate’s value minus any debts and after all available thresholds have been used. These thresholds are the nil rate band (NRB) and the residence nil rate band (RNRB). At a high level, the NRB is £325,000, and the RNRB is £175,000, the latter of which is only available if you leave your home to a direct descendant. The standard rate of IHT due to HMRC on amounts over these thresholds is 40%. This reduces to 36% if at least 10% of your net estate is left to charity.

WHY DO WE GIFT?

We gift for two common reasons: We want to help our family and loved ones now, when they need it, and whilst we can see them enjoy it, as opposed to when we have passed away. This is often called a ‘living inheritance’. Additionally, we may have a large estate and wish to reduce its value so that our beneficiaries pay less or no IHT when we pass away.

HOW MUCH CAN YOU GIFT?

In short, you can gift away however much you want to whoever you like and whenever you like. If these gifts fall within the ‘annual gift allowances’ or are made from your regular surplus income, they automatically fall outside your estate for IHT tax purposes. Otherwise, you must survive seven years after making the gift before the gift is excluded from IHT tax calculations.

THE IMPACT OF SEQUENCING GIFTS

The sequencing of gifts can significantly impact the wealth you want to pass on. In addition to the seven-year rule, there is the less well-known 14-year rule. Giving a gift outright to an individual and/or Absolute/Bare Trust in excess of the annual allowances is known as making ‘Potentially Exempt Transfers’ or PETs.

POTENTIALLY EXEMPT TRANSFERS AND THEIR USES

For example, a common reason for making a PET might be to help a child onto the property ladder. To ensure the gift is outside of your estate for IHT tax purposes, you need to survive seven years from when the gift is made. If the PET is more than the NRB (£325,000), there is gradual tapering on the excess once you have survived for over 3 years. The longer you survive after making the gift (between 3 and 7 years), the greater the tapering.

CHARGEABLE LIFETIME TRANSFERS

Should you settle any money into a relevant property trust, such as a Discretionary Trust, these gifts are known as ‘Chargeable Lifetime Transfers’ or CLTs. An example of such a settlement might be grandparents wanting to pass money down to their grandchildren. A common reason for this may be that their children already have a large estate, so if they were to inherit any more, it would be unhelpful for their IHT position.

COMPLICATIONS IN GIFT ORDER

Complications may arise when an individual has passed away and has made both PETs and CLTs. This is because the order of these gifts can result in bringing 14 years’ worth of gifts into the IHT calculation. When considering which gifts are liable to IHT, the gifts are placed in the order they were made, starting with the oldest and moving towards the date of death.

HMRC RULES ON FAILED PETS

HMRC rules are such that any CLTs made in the seven years before any ‘failed PETs’ must also be brought into account. If an individual makes a PET and dies within 6 years and 11 months, the PET fails. From the ‘failed PET’ date, HMRC will look back a further seven years and include any CLTs in their calculation to determine the IHT due on the PET.

ANNUAL GIFTING ALLOWANCES

Under current legislation, everyone can gift away £3,000 per year. This is called your ‘annual exemption’. Any unused allowance can be carried forward to the following tax year; however, it cannot be carried over again. There is also a wedding allowance of varying amounts depending on the relation, which must be made before the wedding, and the wedding must happen: £5,000 to a child, £2,500 to a grandchild, £1,000 to a relative or friend. Wedding gifts can be combined in the same year with the annual exemption.

SMALL GIFTS ALLOWANCE

You can also make gifts of up to £250 to as many different people as you like, as long as the person has received more than £250 from you that tax year.

 DO YOU REQUIRE INFORMATION OR  PERSONALISED ADVICE ON GIFTING AND INHERITANCE TAX PLANNING?

For those seeking further information or personalised advice on gifting and Inheritance Tax planning, please do not hesitate to contact us for expert guidance tailored to your specific circumstances.

THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL, OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

THE FINANCIAL CONDUCT AUTHORITY DOESN’T REGULATE TRUST PLANNING AND MOST FORMS OF INHERITANCE TAX (IHT) PLANNING. SOME IHT PLANNING SOLUTIONS PUT YOUR MONEY AT RISK, AND YOU MAY GET BACK LESS THAN YOU INVESTED. IHT THRESHOLDS DEPEND ON INDIVIDUAL CIRCUMSTANCES AND THE LAW. TAX AND IHT RULES MAY CHANGE IN THE FUTURE.

How retirees are impacting their financial future by accessing pension pots too soon.

More than three-quarters (78%) of retirees have already dipped into their pension pots by the time they retire, according to recent data[1]. Of these, more than half (52%) withdraw funds five years before their Selected Retirement Age (SRA), with 21% opting to start taking out funds nine to ten years before they retire.

This trend highlights a significant shift in retirement planning behaviours, where immediate financial needs or desires often outweigh the long term benefits of leaving pension funds untouched. Factors such as unexpected medical expenses, the desire to pay off debts or the need for additional income to support a particular lifestyle can drive retirees to access their pension savings earlier than planned.

CONSIDER THE TIMING OF PENSION WITHDRAWALS

The implications of early withdrawals are multi-faceted and can significantly impact retirees’ financial security. By withdrawing funds early retirees potentially miss out on the compound growth that could have been achieved if the money had remained invested. This can result in a smaller pension pot during the later years of retirement when the need for financial stability is often greater.

Furthermore, early withdrawals may indicate insufficient financial planning or awareness about the benefits of delaying pension access. As people live longer and retirement periods extend, it becomes increasingly important for individuals to carefully consider the timing of their pension withdrawals to ensure they stay within their savings.

FINANCIAL IMPACT OF EARLY WITHDRAWALS

The data revealed that the average amount an individual withdraws by age 65 is £47,000. Financial modelling shows how much that £47,000 could grow if invested for longer. If the money stayed invested from age 55 (when the member would have first been ale to take the benefits) for an additional five years, they would have £13,925 more on average by the time they reach 60.

That figure rises to £24,661 if it were to stay invested for ten years to age 65 – a rise of more than 50% and to more than £38,000 if invested to age 70. A separate modelling exercise was conducted assuming that individuals claimed the maximum tax-free cash available at age 55, which currently stands at 25%, equivalent to £11,750.

MAXIMISING PENSION BENEFITS

If the same modelling were run with the remaining £32,250 left in individuals’ pots after taking the tax-free cash, savers would, on average, be £10,441 better off after five years and £18,496 after ten years if they decided to stay invested. These figures highlight the significant financial benefits of delaying withdrawals and allowing pension funds to grow.

The data further shows that most people withdraw money from their workplace pension before retirement age. While early withdrawals are often unavoidable, draining a pension pot too soon can carry substantial risks, which providers and retirees should be aware of and take steps to guard against where possible.

NAVIGATING A CHANGING PENSIONS LANDSCAPE

The pension landscape is ever-changing. People are living longer, which means pensions must cover longer retirements. Additionally, more individuals are choosing to phase into retirement with part-time work, changing how and when they access their pension funds.

Early withdrawals can severely impact the long-term financial stability of retirees. Therefore, individuals must seek professional financial advice to make informed decisions about their pension pots.

PLANNING FOR A SECURE RETIREMENT

Retirees should also consider other sources of income and investments that can support them during their retirement years. Diversifying income streams can provide a safety net and reduce the need to dip into pension funds prematurely.

Proper financial planning ensures that retirees can maintain their desired lifestyle without compromising their financial security. By understanding the implications of early withdrawals and exploring alternatives, retirees can make decisions that will benefit them in the long run.

WANT TO MAKE INFORMED DECISIONS THAT WILL HELP YOU MAXIMISE YOUR PENSION BENEFITS?
If you are approaching retirement or have already started considering your pension options, it’s crucial to understand the impact of early withdrawals on your long-term financial security. Contact us today
to explore your options and create a personalised retirement plan that aligns with your goals. Secure your financial future now – don’t wait until it’s too late!

Source data

[1] The statistics cited were the result of an analysis by Scottish Widows on 232,654 different retirement claim transactions between 2019 and 2023, which has been used from different sources to give a single view.

THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).

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.