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/

Content of the articles featured in this publication is for your general information and use only and is not intended to address your particular requirements or constitute a full and authoritative statement of the law. They should not be relied upon in their entirety and shall not be deemed to be, or constitute advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles

Impact of coronavirus (COVID-19) on Will making

We are living in extraordinary times right now, in the grip of a global coronavirus (COVID-19) pandemic. Many people are concerned to ensure that their affairs are in order and that they have made a Will, which is one of the most important legal documents you can create in life.

It is always sensible to have a valid Will in place to ensure that your estate is divided among the people (or charities) you want to receive it. The coronavirus outbreak has given further impetus to many people to put their affairs in order, and having a valid Will in place is particularly important if you suffer from any underlying health issues or are elderly.

Need to discuss Wills and inheritance

Families are becoming more open about their finances, with the COVID-19 crisis highlighting the need to discuss Wills and inheritance. A study conducted at the height of the pandemic shows the pandemic has encouraged more people to make a Will[1].

A third (33%) of people in the UK have either drafted a new Will or have amended an existing one as a result of the global health and humanitarian crisis we’re facing. The research highlights that this is also having a broader effect and is making families more open about their finances. Nearly four out of five (78%) believe the pandemic will lead to more conversations about inheritance planning within their families.

Complex family set-ups the new normal

The pandemic has not spurred everyone to act: more than a fifth (22%) of people surveyed say they do not have a Will, and do not plan to draw one up. Worryingly, around one in ten say they believe doing so would be tempting fate.

Families can face major problems if there is not a Will in place, particularly as complex family set-ups are increasingly becoming the new normal. Nearly one in seven (13%) families in the UK now have a stepson, stepdaughter and/or adopted son or daughter as part of their family. And a fifth (21%) of parents have been involved in two or more romantic relationships that have led to them being legally responsible for children to whom they have no biological link.

Significant impact on estate planning

An outdated Will can be challenged, which could be a drain on a family’s estate. This is especially pertinent as only 27% of adults are confident that their current Wills are unlikely to offend relatives. Nearly half (49%) of those with a Will have never rewritten or amended it. Just 24% have amended their Will once, 16% have amended it twice, and only 5% have amended it three times.

Rising concerns over marital health is also having a significant impact on estate planning. The study also found that over two thirds (67%) of parents have decided to delay family inheritance planning for fear that their children’s marriages will end in divorce, with the likelihood of wealth and assets leaving the family estate.

Mitigate substantial wealth leaving the family

In fact, a quarter (27%) of parents have little or no confidence about the prospects of their children’s marriages lasting a lifetime, and one in six (16%) have doubts about their in-laws’ financial competence. The findings show that these worries are not unsubstantiated, with more than one in four parents (27%) having children who are separated or divorced.

To mitigate substantial wealth leaving the family in the event of divorce, a fifth of parents (21%) are gifting small amounts to their children to help with day-to-day living, while 19% are gifting directly to their grandchildren. Parents have other reasons for restricting levels of financial support: 13% of parents say it will reduce their children’s incentive to work, and 12% think there would be little left for their grandchildren.

Source data:
[1] Research conducted by Consumer Intelligence for Handelsbanken in April 2020 with over 1,000 respondents

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

Content of the articles featured in this publication is for your general information and use only and is not intended to address your particular requirements or constitute a full and authoritative statement of the law. They should not be relied upon in their entirety and shall not be deemed to be, or constitute advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles

Peace of mind that there is someone you trust to look after your affairs

A Lasting Power of Attorney (LPA) is a legal document that allows you to appoint one or more people to make decisions on your behalf during your lifetime. The people you appoint to manage your affairs are called the ‘attorneys’.

An LPA is a completely separate legal document to your Will, although many people put them in place at the same time as getting their Will written, as part of wanting to plan for the future.

During your lifetime
Once you have an LPA in place, you can have peace of mind that there is someone you trust to look after your affairs if you became unable to do so yourself during your lifetime. This may occur, for example, because of an illness, old age or an accident.

Having an LPA in place can allow your attorney to have authority to deal with your finances and property, as well as make decisions about your health and welfare. Your LPA can include binding instructions together with general preferences for your attorney to consider. Your LPA should reflect your particular wishes so you know that the things that matter most would be taken care of.

Required legal capacity
You can only put an LPA in place whilst you are capable of understanding the nature and effect of the document (for example, you have the required legal capacity). After this point, you cannot enter into an LPA, and no one can do so on your behalf.

Many people don’t know that their next of kin has no automatic legal right to manage their spouse’s affairs without an LPA in place, so having to make decisions on their behalf can become prolonged and significantly more expensive.

A Health and Welfare Lasting Power of Attorney can generally make decisions about matters including:
Where you should live
Your medical care
What you should eat
Who you should have contact with

What kind of social activities you should take part in

You can also give special permission for your attorney to make decisions about life-saving treatment.

A Property and Financial Affairs Lasting Power of Attorney can cover decisions such as:
Buying and selling property

Paying the mortgage
Investing money
Paying bills
Arranging repairs to property

Manage your affairs
Without an LPA in place, there is no one with the legal authority to manage your affairs, for example, to access bank accounts or investments in your name or sell your property on your behalf. Unfortunately, many people assume that their spouse, partner or children will just be able to take care of things, but the reality is that simply isn’t the case.

In these circumstances, in order for someone to obtain legal authority over your affairs, that person would need to apply to the Court of Protection, and the Court will decide on the person to be appointed to manage your affairs. The person chosen is appointed your ‘deputy’. This is a very different type of appointment, which is significantly more involved and costly than being appointed attorney under an LPA.

If you wish to have peace of mind that a particular person will have the legal authority to look after your affairs, and you want to make matters easier for them and less expensive, then you should obtain professional advice about putting in place an LPA.

Health and Welfare Lasting Power of Attorney
Allows you to name attorneys to make decisions about your healthcare, treatments and living arrangements if you lose the ability to make those decisions yourself. Unlike the Property and Financial Affairs LPA, this document will only ever become effective if you lack the mental capacity to make decisions for yourself.

If you can’t communicate your wishes, you could end up in a care home when you may have preferred to stay in your own home. You may also receive medical treatments or be put into a nursing home that you would have refused if only you had the opportunity to express yourself; and this is when your attorney, appointed by the LPA, can speak for you.

Property and Financial Affairs Lasting Power of Attorney
Allows you to name attorneys to deal with all your property and financial assets in England and Wales. The LPA document can be restricted, so it can only be used if you were to lose mental capacity, or it can be used more widely, such as if you suffer from illness, have mobility issues or if you spend time outside the UK.

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 dependents

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

Content of the articles featured in this publication is for your general information and use only and is not intended to address your particular requirements or constitute a full and authoritative statement of the law. They should not be relied upon in their entirety and shall not be deemed to be, or constitute advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles