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Monthly Archives :

May 2021

Retirement Options

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What can you do with your pension pot?

When the time comes to access your pension, you’ll need to choose which method you use to do so, with options including: buying an annuity, taking income through (flexi-access) drawdown, withdrawing lump sums or a combination of all of them.

There are advantages and disadvantages to each method, and in some cases your decision is permanent, so it’s important to ensure that you obtain professional financial advice when considering your different options.

This is a complex calculation that must take into account the growth rate your investments might achieve, the eroding effects of inflation on your savings, and how long your savings will need to last.

Annuities – guaranteed income for life

Annuities enable you to exchange your pension pot for a guaranteed income for life. They were once the most common pension option to fund retirement. But changes to the pension freedom rules have given savers increased flexibility.

You can normally withdraw up to a quarter (25%) of your pot as a one-off tax-free lump sum, then convert the rest into a taxable income for life – an annuity. There are different lifetime annuity options and features to choose from that affect how much income you may receive. You can also choose to provide an income for life for a dependent or other beneficiary after you die.

Flexible retirement income – pension drawdown

When it comes to assessing pension options, flexibility is the main attraction offered by income drawdown plans, which allow you to access your money while leaving it invested, meaning your funds can continue to grow.

This option normally means you take up to 25% of your pension pot, or of the amount you allocate for drawdown, as a tax-free lump sum, then reinvest the rest into funds designed to provide you with a regular taxable income.

You set the income you want, though this might be adjusted periodically depending on the performance of your investments. You need to manage your investments carefully because, unlike a lifetime annuity, your income isn’t guaranteed for life.

Small cash sum withdrawals – tax-free

This is an important consideration for those weighing up pension options at age 55, the earliest age at which you can take up to 25% of your pension pot tax-free. You should ask yourself whether you really need the money now. If you can afford to leave it invested until you need it then it has the opportunity to grow further.

For each cash withdrawal, the remaining counts as taxable income and there could be charges each time you make a cash withdrawal and/or limits on how many withdrawals you can make each year. With this option your pension pot isn’t re-invested into new funds specifically chosen to pay you a regular income and it won’t provide for a dependant after you die.

There are also more tax implications to consider than with the previous two options. So, if you can, it may make more sense to leave it to grow so you can enjoy a larger tax-free amount in years to come. Remember, you don’t have to take it all at once – you can take it in several smaller amounts if you prefer.

Combination – mix and match

Of all the pension options, if appropriate to your particular situation, it may suit you better to combine those mentioned above. You might want to use some of your savings to buy an annuity to
cover the essentials (rent, mortgage or household bills), with the rest placed in an income drawdown scheme that allows you to decide how much you can afford to withdraw and when.

Alternatively, you might want more flexibility in the early years of retirement, and more security in the later years. If that is the case, this may be a good reason to delay buying an annuity until later in life.

The value of retirement planning advice

There will be a number of questions you will need answers to before deciding how to use your pension savings to provide you with an income. These include:

  • How much income will each of my withdrawals provide me with over time?
  • Which withdrawal option will best suit my specific needs?
  • How much money can I safely withdraw if I choose flexi-access drawdown?
  • How should my savings be invested to provide the income I need?
  • How can I make sure I don’t end up with a large tax bill?

How much are you saving for your retirement?

We can advise on your retirement planning, whether you are in the process of building your pension pot or getting ready to retire. Working closely with you, we will identify what you want from  your pension and develop a structure that meets your requirements. To find out more, contact us to discuss your options.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2021). 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 are 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.

Six Principles of Investing

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Putting aside money for your future and getting it to work for you! Whatever stage of life you’ve reached and whatever plans you may have for the future, you want your money to earn the best return possible without taking undue risk. That’s why it’s important to invest in a way that’s right for you and that will meet your goals.

Creating and maintaining the right investment strategy plays a vital role in securing your financial future. How much control do you want over your investments? Investing can seem daunting but you don’t have to do it all on your own.

So what do you need to consider?

1 Have a plan and stick to it

Your wealth should work in all the ways you want it to. Whatever your goals are in life, careful planning and successful investing of your wealth can help you get there. The first thing to consider is to establish your investment objectives based on your future goals. It is one thing to have a target, but a sound financial plan can make the difference between simply hoping for the best and actually achieving your investment goals. You need to review your investments regularly to ensure they remain on track, stay focused on your plan and make sure you don’t get distracted by short-term market uncertainty.

2 Cash isn’t always king

Putting your money in cash can seem appealing as a safe and secure option – but inflation is likely to eat away at your savings. For most people with longer-term investment plans, cash needs to be supplemented with investment in other asset classes that can beat the perils of inflation and offer better capital growth potential. If you’re investing – especially for major goals years away, such as retirement – you can’t afford to ignore the corrosive effect rising prices can have on the value of your assets. Different asset classes provide varying degrees of protection against inflation.

3 Diversify and always consider your investments as a whole

If we could see into the future, there would be no need to diversify our investments. We could merely choose a date when we needed our money back, then select the investment that would provide the highest return to that date. One of the easiest ways to manage investment risk and improve your probability of success is to have a variety of investments. You can diversify your portfolio across different asset classes, geographical markets and industries. A diversified portfolio, including a range of different assets, will help to iron out the ups and downs and avoid exposing your portfolio to undue risk.

4 Start investing early if you can

Starting early is one of the best ways to build wealth. Investing for a longer period of time is widely considered more effective than waiting until you have a large amount of savings or cash flow to invest. This is due to the power of compounding. Compounding is the snowball effect that occurs when the money you earn investing generates even more earnings. Essentially, you grow not only the original amount you invested, but also any accumulated interest, dividends and capital gains. The longer you are invested, the more time there is for your investment returns to compound.

5 Don’t abandon your plans

Some investors suffer from what behaviourists call ‘activity bias’: the urge to ‘just do something’ in a crisis, whether the action will be helpful or not. When investments are falling in value, it can be
tempting to abandon your plans and sell them – but this can be damaging because you won’t be able to benefit from any recovery in asset prices. Markets go through cycles, and it’s important to  accept that there will be good and bad years. Short-term dips in the market tend to be smoothed out over the long term, increasing the potential for healthy returns.

6 Tailored investment advice

Every single investor’s needs are different and, while the points above are good general tips, there’s no substitute for an investment approach that’s tailored specifically for you. Once we know an investor’s risk tolerance and their investment goals, we can put in place a global portfolio of equities, fixed income, cash, and, when appropriate, alternative investments. The goal is to invest with a long-term view and maximise after-tax returns. It may just be the best investment you ever make.

7 Make informed decisions

Making the right choices to invest for your future can seem complex. But with the right investment strategy in place you can ensure you are able to make informed decisions to secure the financial
future you want. Life doesn’t stand still, so your investment approach shouldn’t either. Although people may have very different goals depending on what life stage they are at, their goals can be broadly categorised into essential needs, lifestyle wants and legacy aspirations. Getting investment advice can be one of the most beneficial things you can do for your personal finances and long-term financial wellbeing.

Looking to invest for growth, income of both?

If you’re not sure which investments are right for your needs, we can help. Whether you are looking to invest for growth, income or both, we can provide the expert advice to ensure you achieve your financial goals. To identify which investment options are right for your individual circumstances or to find out more, please contact us – we look forward to hearing from you.

The value of your investment can go down as well as up and you may get back less than you paid in. Laws and tax rules may change in the future. Your own circumstances and where you live in the UK also have an impact on tax treatment.

Generation Xers Chronically Under-Saving

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57% face financial difficulty in retirement years.

According to The International Longevity Centre UK (ILCUK) report, a substantial proportion of Generation Xers (those born between 1965 and 1980) in the UK face financial difficulty in retirement, with one in three expected to face significant disadvantages.[1].

Many 40-55-year-olds are reluctant to invest because they are frustrated by various financial stresses, such as coping with fluctuating incomes and balancing conflicting goals like childcare, loans and mortgages.

Multiple financial pressures

Generation Xers are chronically under-saving, with nearly one in three at risk of reaching retirement with inadequate incomes. The majority (57%) say they want to save more for retirement but they cannot afford to because of multiple financial pressures.

Many are also unaware they are saving too little to achieve the level of income they desire: just 7% of those with a defined contribution (DC) pension are saving enough to achieve a moderate lifestyle in retirement.

No pension funds

More than half of those who contribute to DC pensions do so with less than 8% of their wages, and over half have substantial delays in their pension savings of at least ten years.

Of those who are employed, more than a quarter expect to rely on the State Pension for the bulk of or all their retirement money, or have no pension funds at all.

Additional income in retirement

COVID-19 has further disrupted people’s retirement plans, with one in five Generation Xers saving less or spending down their savings as a result.

Generation X is a very diverse cohort. Some subgroups in the age band are well prepared for retirement: almost 60% expect to have additional income in retirement, such as property wealth, other investments or savings, an inheritance or income from their partner or family.

High risk of financial difficulty

But other subgroups are at high risk of financial difficulty in later life, including those on benefits, the self-employed, low earners, renters and carers.

The pandemic has disproportionately influenced Generation Xers: they are the age demographic most affected by the pandemic, with 91,000 more older adults unemployed now than a year earlier. This is a year-over-year rise of more than 30%, and far more than in any other age demographic.

Uncertain about retirement plans

According to the ILCUK study, nearly 40% of Generation Xers are uncertain about retirement plans, and few grasp the rate of investment needed to reach a secure retirement income.

The findings of this report are really worrying and highlight the precarious financial future facing some of those in their 40s and 50s. Increased housing costs, insecure work and caring responsibilities risk leaving many without the savings they need for later life.

Maximise your wealth potential

Everyone’s situation is unique. This is why a personalised approach is important to help you, and your family, map out your goals and aspirations. Whatever the source of your wealth, there is an opportunity to maximise its potential through professional financial advice. To find out more, please contact us.

Source data: [1] https://ilcuk.org.uk/slipping-between-the-cracks/

Retirement Clinic

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Answers to the myths about your pension questions. If you are approaching retirement age, it’s important to know your pension is going to finance your plans.

Pension legislation is extremely complex and it’s not realistic to expect everyone to understand it completely. But, since we all hope to retire one day, it is important to get to grips with some of the basics. It’s particularly helpful to become aware of the things you may have thought were facts that are actually myths. Here are some examples.

MYTH: The government pays your pensions

FACT: The government pays most UK adults over the pension age a State Pension, which is currently:
– Retired post-April 2016 – max State Pension of £179.60 a week
– Retired pre-April 2016 – max basic State Pension of £137.60 a week (a top-up is available for some, called the Additional State Pension)

Not everyone is eligible for the full amount, which requires you to have at least 35 qualifying years on your National Insurance record. If you have less than ten qualifying years on your record, you’ll receive nothing. Even if you receive the full amount, you’ll usually need to supplement it with your own pension savings.

MYTH: Your employer pays your pension

FACT: Most people are automatically enrolled into a workplace pension. Your employer is usually required to pay a minimum of 3% of your salary into it and you must also pay a minimum of 5%
of your salary.

If you keep your contributions at the minimum level, it might be difficult to save enough for retirement. As life expectancies grow longer, your retirement can be almost as long as your working life. It’s therefore important to put aside a portion of your earnings to create a pension pot that will enable you to receive the income and live the lifestyle you want during retirement.

MYTH: You can’t save more than your lifetime allowance

Fact: There is a lifetime allowance on the benefits you can access from your pension, which is currently £1,073,100 (tax year 2021/22). That doesn’t mean that you can’t withdraw any more after that, but it does mean that you’ll pay a tax charge of up to 55%. However, there are ways of withdrawing the money with a tax charge of 25%.

MYTH: Your pensions provider’s default fund is suitable for everyone

Fact: Most pension default funds will start out with a high-risk strategy and steadily move your capital into lower-risk investments, such as bonds and cash, as you get closer to retirement. This is to reduce volatility in the value of your investments so that you can have a higher degree of confidence in how much you’ll eventually end up with.

If you don’t plan to purchase an annuity, you don’t necessarily need to reduce volatility before retirement. You may be leaving some of your money invested for several more decades, in which case a higher risk strategy may be more  appropriate.

MYTH: Annuities are outdated

Fact: There was a time when almost everyone bought an annuity when they retired, and that time has passed because there are now alternative ways to access your pension savings. But annuities still have a useful role for generating a retirement income and can be an appropriate product for some people. Unlike other pension withdrawal methods, such as drawdown, an annuity offers a fixed income for life, so there’s no risk of your money running out. That’s a crucial benefit for many pensioners.

MYTH: Your can’t pass on a pension

Fact: If you’ve used your pension savings to purchase an annuity, the income from this will usually cease when you die. But if you have pension savings that you haven’t used to buy an annuity (for example, if you’ve been taking an income through drawdown), what’s left can be passed on to a loved one.

If you die before the age of 75 there will usually be no tax to pay by the beneficiary. Otherwise, they will need to pay Income Tax according to their tax band.

Look after your future

There’s a whole lot to think about when you’re planning for retirement. Is it worth paying into private or workplace pensions? Are you saving enough? Which investments should you choose? All these unanswered questions can make planning feel a little overwhelming. To review your situation or consider your options, please contact us – we look forward to hearing from you.

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.