Finance

Retirement vs Cost of Living Crisis

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Funding the retirement lifestyle you want vs the cost of living

While it’s impossible to predict the future with complete certainty, there are a few things you can do to feel more confident about spending your money in retirement:

  • Watch out for unnecessary tax bills
  • Make the most of your individual savings accounts (ISA)
  • Add up all sources of income
  • Keep track of your investments
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Funding your retirement vs. the cost of living crisis

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Carl Hasty, Financial Adviser at Ellis Bates discusses the funding your retirement vs. the cost of living crisis, what you should do with your pension contributions and the alternatives to consider instead of taking money out of your pension.

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Cost of living crisis

UK Cost of Living Crisis

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Cost of living crisisFunding the retirement lifestyle you want vs the cost of living: time to get your retirement plans in motion!

One of the most common concerns among those approaching retirement is whether they will have enough money to last them with only 25% of retirees feel very confident they’ve saved enough for retirement.

The cost of living crisis

As food prices continue to soar and petrol costs reach an all-time high in the UK, the rising cost of living is without doubt having an impact on many people’s financial plans, both short and long term.

If you’re approaching retirement or have already started taking money from your pension or other retirement savings, you wouldn’t be alone in feeling a little anxious about the effect the cost-of-living crisis might have on your lifestyle in retirement. While it’s impossible to predict the future with complete certainty, there are a few things you can do to feel more confident about spending your money in retirement.

Add up all sources of income

Your main source of retirement income may well be your pension plan. But when it comes to planning your finances in retirement, it’s important to think beyond this. Consider other potential sources such as Individual Savings Accounts (ISAs) and other investments, as well as any rental income you receive from rental properties you let.

Don’t forget the State Pension, which is currently £185.15 a week (£9,628 a year) for a single person with a full entitlement. Although the State Pension’s annual increase is currently below inflation, every little helps and the total of all your savings and income might add up to more than you think.

Watch out for unnecessary tax bills

Paying too much tax in retirement is a common pitfall for some retirees, and one that could be potentially avoided with having the right plans in place. If you’re already taking or plan to take income from multiple sources, you need to consider how that will be taxed. When and how you take your money can make a big difference to how much tax you pay and how long it will last. Taking money little and often could make all the difference when it comes to reducing your tax bill.

When it comes to your pension savings, you can typically take 25% tax-free from age 55 (age 57 in 2028), either in one go or spread out over a longer period. After this, any money you take from your pension savings, as well as your State Pension, is taxable just like any other income.

That means you’ll need to pay income tax on anything over your tax-free cash limit and any annual personal Income Tax allowance you get. It’s likely that the more money you take, the more tax you’ll have to pay, although how much will depend on which tax band your income falls into. So if you take all of your pension savings at once, or in big lump sums, you could be paying more tax than you need to. But by taking your pension savings over a number of years and taking just enough to stay in the lowest tax band you can, you could keep more of your money overall.

Make the most of your individual savings accounts (ISA)

Another way to avoid an unnecessary tax bill is to make the most of your ISA savings. You don’t pay tax on any investment growth or interest you earn, or on the proceeds you take from an ISA. So it’s a very tax-efficient way to save.

You could consider using any ISA savings you have first and delay accessing your pension savings, giving them more time to stay invested and potentially grow in value. Remember though, the value of all investments can go down as well as up, and you may get back less than you paid in.

Or, if you’ve already started taking an income from your pension, you could use your ISA savings to supplement that income. This could allow you to take smaller payments from your pension and avoid overpaying Income Tax on them. Getting to grips with tax implications can be a bit overwhelming as there’s a lot to consider.

Tax rules and legislation can change, and personal circumstances and where you live in the UK also have an impact on your tax treatment. On top of that, tax varies for other sources of income like property, state benefits, or even your salary if you’re planning on working in some capacity for a little longer.

Keep track of your investments

Where your money is invested could have the biggest impact on how long it will last in retirement. It’s important to regularly review your investments to make sure they remain on track and remain aligned with your plans and attitude to investment risk. For example, your pension savings may be invested in fairly high-risk funds that have the potential to grow significantly in value, but also are more likely to be impacted, particularly during periods of market volatility.

Moving to lower-risk investments means that you’re less likely to see big ups and downs in the value of your pension savings. However, if you’re relying on your pension savings to provide you with a comfortable income for the rest of your life, you also need to make sure that your investments will provide enough growth potential. This is particularly important in the current climate where your money faces the double challenge of rising inflation and potentially having to last for many years.

Want to review your retirement plans?

If you have specific questions about funding your retirement lifestyle, or if you’re feeling anxious about spending money in retirement, speak to us to discuss your options

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The Importance of a Will

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A staggering 3 in 5 UK adults do not have a valid Will in place, which is 60% of the adult UK population. Making a Will is an important part of financial planning.

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Key Tax and Pension Changes from the Autumn Statement

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Last week Jeremy Hunt unveiled his Autumn Statement aimed at tackling inflation and stabilising UK finances. The Chancellor detailed issues such as tax, government spending and energy as part of his plan to navigate the impending recession.

Your Ellis Bates team are busy reviewing your situation given these changes and you will be discussing the implications and actions with your Financial Adviser in your next review.

If you are not currently a client with Ellis Bates and feel now is the time to discuss your tax allowance maximisation, your new CGT position and pension planning in light of these changes, please do not hesitate to book a chat as we are here to help.

Pension Changes

  • State pension triple lock has been retained meaning the state pension will rise by 10.1% in April 2023. Those on the new state pension will receive £203.85 per week (up from £185.15)
  • Pension Annual Allowance (100% of earnings or £40,000) and Pension Lifetime Allowance (£1,073,100) have both been frozen until April 2026.

Your Ellis Bates Financial Adviser will work with you to determine if you need to consider alternative ways to save towards your retirement in light of these changes at your next review.

Income Tax Changes

  • From 6th April 2023, the 45% Additional Rate of Income Tax threshold will be brought down to £125,140 (from its current rate of £150,000)
  • Income tax allowances will be frozen until April 2028 – Personal allowance will remain at £12,570 and the threshold for a higher rate of income tax (40%) will remain at £50,270

National Insurance thresholds will remain frozen until April 2028.

Inheritance Tax

The nil rate band will remain at £325,000, the residence nil-rate remains at £175,000, and the residence nil-rate band taper will still start at £2 million.

Capital Gains Tax Changes

In April 2023 Capital Gains Tax (CGT) annual exempt amount will be reduced from £12,300 to £6,000. It will be reduced further to £3,000 from April 2024

Your Ellis Bates team are busy reviewing your situation given these changes in CGT and will be in touch over the coming weeks.

There will be no change to the rate of Capital Gains Tax:

Tax Band Tax rate for Property Sale  Tax rate for other Asset
Basic Rate 18% 10%
Higher Rate 28% 20%

Stamp Duty

There will be no immediate change to Stamp Duty Land Tax (SDLT), the increases which were implemented on 23rd September 2022 (SDLT nil-rate threshold was increased from £125,000 to £250,000. The nil-rate threshold paid by first-time buyers was increased from £300,000 to £425,000) will remain until March 2025, after which the allowances will revert to their previous levels.

Are you a business owner?

If you are a business owner, a number of changes and support systems were announced:

  • Business Rates multipliers will be frozen in 2023-24 at 49.9p (small business multiplier) and 51.2p (standard multiplier)
  • A Transitional Relief scheme will be implemented to support and help up to 700,000 properties adapt to their new bills from April 2023
  • The Retail, Hospitality and Leisure relief scheme is being extended and increased from 50% to 75% for 2023-24, offering up to £110,000 per business
  • Supporting Small Business From 1st April 2023, the Supporting Small Business (SSB) scheme will cap bill increases at £50 per month (£600 per year) for the next 3 years. This will affect an estimated 80,000 properties.
  • Improvement Relief will now be introduced from April 2024 (originally intended for 2023)
  • Dividend Allowance will be reduced from £2,000 to £1,000 and reduced further, to £500, in April 2024.
  • Entrepreneurs Relief (Business Asset Disposal Relief) remains at 10% CGT if you sell all or part of your business (or its assets) on the profits you’ve made, up to £10m in total.

If you would otherwise pay higher rate CGT (20 per cent), this means you can save up to £1m in your lifetime through entrepreneurs’ relief.

If you are a business owner and an Ellis Bates client, your dedicated Financial Adviser will discuss these changes and how they may affect you and the actions needed in your next annual review meeting.

Stay updated: we update our Financial Advice hub with the latest financial news and insights, so hit the link to stay informed and up to date

If you do not currently receive financial advice from Ellis Bates, please Book a Chat to discuss this raft of tax changes and how we can help.

Sources: https://www.which.co.uk/news/article/capital-gains-and-dividends-tax-changes-in-the-2022-autumn-statement-ac6kT0e7yZ4X
https://www.gov.uk/government/publications/autumn-statement-2022-documents/autumn-statement-2022-html#:~:text=The%20Autumn%20Statement%20sets%20out%20a%20package%20of%20targeted%20support,bill%20increases%20following%20the%20revaluation.

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The United Nations 17 Sustainable Development Goals

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We discuss The United Nations 17 Sustainable Development Goals and how we align our investment portfolios to one or more of these, whilst breaking these down into environmental issues, social issues and governance issues.

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FT Adviser Top 100

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We are delighted to confirm that Ellis Bates Financial Advisers have been included within FT Adviser’s Top 100 Financial Advisers again.

The judging criteria is based on a number of factors including assets under management, gross inflows throughout the year, client retention and the number of Chartered or certified Financial Planners.

There are currently around 5,500 Adviser firms in the UK so to be in the Top 100 is a fantastic achievement and we’d like to thank everyone for their contribution towards this.

“These standards are a decent indication of a firm trying to do the right thing by its customers. 

This year marks 10 years since the introduction of the Retail Distribution Review; seven years since pension freedoms came into force and six years since the Financial Advice Market Review highlighted serious issues that needed to be addressed.

And over that time, businesses have adapted to change, whether this be tax policy turning on a pin, dealing with the after-effects of the pandemic or embracing the digital transformation.

But finding the right balance between face-to-face advice and online services – as well as developing robust succession plans to future-proof the advice industry – could yet result in some significant changes to business models.” 

– FT ADVISER, https://www.ftadviser.com/your-industry/2022/10/21/who-are-ftadviser-s-top-20-financial-advice-firms/ 

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Your Credit Score

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Cost of Living Crisis

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Debt Management

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Where to seek help with Debt management

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