Pensions

Busting the myths about pensions

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If you are approaching retirement age, it’s important to know your pension is going to finance your future plans and provide the lifestyle you want once you stop working. 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.

Many of us have made pension provision, but some of us don’t know very much about the details. To help you get a handle on some of the myths around pensions, we’ve got answers to some of the things you may have been wondering about. 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 pension

Fact: The government pays most UK adults over the pension age a State Pension, which is currently:

  • Retired post-April 2016 full rate State Pension of £185.15 a week
  • Retired pre-April 2016 full rate basic State Pension of £141.85 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 2022/23). 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, it was announced in the Spring Budget 2023 that this will be abolished from April 2023.

Myth: Your pension 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: You 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.

Get in touch

If you would like more information on our pension planning services or are looking for financial advice, then please book a chat.

Tax Year End

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Tax Year End Checklist – Have you made use of your 2022/23 Allowances?

  • ISA allowance: £20,000pa
  • Junior ISA allowance: £9,000pa
  • Pension annual allowance: £40,000*pa (*or 100% of your earning and this allowance varies for higher rate tax payers and business owners.)
  • Check your carry-forward pension allowance
  • Check your pension lifetime allowance status (£1,073,100)

For more information on our tax planning services, please get in touch.

Taxing Times

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Time for a tax health check?

With the current tax year having begun on 6 April 2022, the clock is ticking and it is important to utilise all the tax reliefs and allowances available to you before 5 April 2023 in order to minimise any potential liabilities.

Personal tax planning should be at the top of your agenda as the end of the current tax year is not too far away. Taking action now may give you the opportunity to take advantage of any remaining reliefs, allowances and exemptions.

At the same time, you should be considering whether there are any planning opportunities that you need to consider either for this tax year or for your long-term future. We’ve listed a few reminders of the issues you may want to consider as worthy of including in your 2022/23 tax health check to-do list.

Some key things you might need to action before the tax year end

1. Personal reliefs

Married couples should consider utilising each person’s personal reliefs, as well as their starting and basic rate tax bands. Could you make gifts of income-producing assets (which must be outright and unconditional) to distribute income more evenly between you both?

2. Salary sacrifice

This is an especially tax-efficient way for you to make pension contributions, to save and reduce your Income Tax and National Insurance.
Have you considered exchanging part of your salary for payments into an approved share scheme or additional pension contributions?

3. Pensions annual allowance

Unless you are an additional rate taxpayer or have already accessed pension benefits then you are entitled to make up to £40,000 of pension contributions per tax year. Have you fully utilised your tax-efficient contributions for this tax year or any unused allowances from the three previous tax years?

4. Stakeholder pensions

A stakeholder pension is available to any United Kingdom resident under the age of 75. Children can also make annual net contributions of £2,880 per year, making the gross amount £3,600 regardless of any earnings. It is also a very beneficial way of giving children or grandchildren a helping hand for the future. Is this an option you or a family member should be utilising?

5. Large pension funds

The Pension Lifetime Allowance (LTA) is currently £1,073,100 and has been frozen at this level until the 2025/26 tax year. The maximum you can pay in is £40,000 per annum unless you pay tax at 45% in which case the annual limit could be as low as £4,000. Inflationary increases by the end of the current tax year could also have an impact on your pension funds. Do you have a plan in place to protect your money from this?

6. Pension drawdown

If your are 55 or over you could access 25% tax-free cash from your Defined Contribution (also known as Money Purchase) pension pots and invest the rest. However, drawing large amounts in one tax year can lead to a larger tax bill than if spread over a longer period. Do you know the implications of taking money out of your pension pots?

7. Passing on your pension

Usually called a ‘spousal by-pass trust’, although the recipient may not always be a spouse, this is a discretionary trust set up by the pension scheme member or pension holder to receive pension death benefits. Are your pension death benefits written in trust?

8. Individual Savings Accounts (ISAs)

An ISA allows you to save and invest tax-efficiently into a cash savings or investment account. The proceeds are shielded from Income Tax,
tax on dividends and Capital Gains Tax. The government puts a cap on how much you can put into your ISA or ISAs in any tax year (from 6 April to 5 April). The ISA allowance for 2022/23 is set at £20,000. Have you fully utilised the maximum annual allowance?

9. Junior ISAs

This is a long-term tax-efficient savings account set up by a parent or guardian, specifically for the child’s future. Only the child can access the money, and only once they turn 18. Have you invested the maximum £9,000 allowance for your child or children?

10. Lifetime ISAs (LISAs)

The Lifetime ISA (LISA) is a tax-efficient savings or investments account designed to help those aged 18 to 39 at the time of opening to buy their first home or save for retirement. The government will provide a 25% bonus on the money invested, up to a maximum of £1,000 per year. You can save up to £4,000 a year, and can continue to pay into it until you reach age 50. Could you be taking advantage of this very tax-efficient option?

11. Capital Gains Tax (CGT)

There are two different rates of CGT – one for property and one for other assets. If your assets are owned jointly with another person, you could use both of your allowances, which can effectively double the amount you can make before CGT is payable. If you are married or in a registered civil partnership, you are free to transfer assets to each other without any CGT being charged. It is currently £12,300 but will be reduced to £6,000 from 6 April 2023 and £3,000 from 6 April 2024. Have you fully used your current £12,300 annual exemption?

12. Inheritance Tax (IHT) relief

IHT must be paid on the value of any estate above £325,000, or up to £1 million for married couples including the residence nil-rate band). However, certain business assets, including some types of shares and farmland, in private trading companies can qualify for 100% relief from IHT. The government has frozen the IHT thresholds for two more years to April 2028. Are you taking advantage of the reliefs available to you?

13. Residence nil-rate band (RNRB)

This allowance was introduced during the 2017/18 tax year and is available when a main residence is passed on death to a direct descendant. The allowance is currently £175,000. When combined with the nil-rate band of £325,000, this provides a total IHT exemption of £500,000 per person, or £1 million per married couple. If you are planning to give away your home to your children or grandchildren (including adopted, foster and stepchildren) the RNRB must be claimed. There is a form for this purpose – IHT435. The form is available on the Gov.uk website. If applicable, have you applied for the RNRB?

14. Charitable and personal gifts

If you leave at least 10% of your net estate to charity a reduced inheritance rate of 36% applies rather than the usual 40%. Other exemptions apply for inter-spousal transfers, transfers of unused annual income, business and agricultural assets, and for various other fixed, small amounts. Are you intending to make gifts before the end of the current tax year?

15. Trust funds

These help protect your assets and guarantee that your loved ones have financial stability for their future. Crucially, a trust can help to avoid IHT and ensure that the majority of your money, shares and equity are passed on in the most efficient way. Should you consider setting up a trust? Future legislation could potentially result in changes to tax law, which could in turn require adjustments to your plans.

Want to talk about a tax health check?

We hope you find this checklist useful, but please bear in mind that this only provides a summary of the options available and not all options will be suitable for everyone. Therefore, for more information in respect of the ideas outlined, please contact us.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless 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 financial conduct authority does not regulate taxation and trust advice. Trusts are a highly complex area of financial planning.

 

Divorce and my Pension

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  • The UK currently holds £15.2 trillion pounds in household wealth
  • Private pensions represent the biggest single component of this wealth – at around 42% of the total (£6.4 trillion)
  • Agreeing a fair separation of this pension wealth at a time of divorce will be critical to the future financial wellbeing of both parties

If you’re going through a divorce and would like to discuss your options regarding your pensions then please contact us.

Divorce and Finances

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Divorce is often referred to as one of the most traumatic and stressful events anyone can go through, and it can also be a costly experience. Financial Planner, Carol Lammy-Steele explains how she helped one of her clients through this difficult life experience.

If you’re going through a divorce, one of the many things you’ll need to think about is your pension. If you would like to discuss your options, please contact us.

A male looking sad when thinking about his pensions and divorce

Divorce and Pensions

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A male looking sad when thinking about his pensions and divorceEnsuring an equal division of all the assets within the matrimonial pot.

The breakdown of a marriage is often referred to as one of the most traumatic and stressful events anyone can go through. Divorce can also be a costly experience, often including legal fees, a new home, a new car and new childcare costs. So, it’s perhaps predictable that so many need to rely on savings or credit cards for support during this time.

When dealing with finances on divorce, the starting point is an equal division of all the assets within the matrimonial pot. It’s critical that, as part of the separation process, couples take time to think about and discuss one of their single most valuable assets, their pension.

Relevant factor in any divorce

It’s common that one party will have significant pension provision, and the other party may have little or none. Clearly, this could be a relevant factor in any divorce.

Figures[1] show that in 2020 there were 103,592 divorces granted in England and Wales, but with a new law that came into force on 6 April 2022 making it much easier for couples to get divorced through a ‘no fault’ plea[2], this figure is likely to increase in the coming years.

Impact of divorce on finances

Thinking about family finances may be the last thing couples want to do at this difficult time. However, it’s important to understand the impact that divorce will have on finances, including pensions.

The UK currently holds £15.2 trillion pounds in household wealth[3]. Private pensions represent the biggest single component of this wealth – at around 42% of the total (£6.4 trillion). Agreeing a fair separation of this pension wealth at a time of divorce will be critical to the future financial wellbeing of both parties.

Average age reaches an all-time high

As a result of divorce, as many as nearly one in five (19%) say they will be, or are, significantly worse off in retirement. The average age for getting divorced has reached an all-time high of 47 years and 5 months for men and 44 years and 9 months for women[4], so it’s fair to assume that the levels of wealth accumulated in couples’ pension pots may also be fairly high.

The research suggests that;

  • one in seven (15%) of divorced people didn’t realise their pension could be impacted by getting divorced
  • and more than a third (34%) made no claim on their former partner’s pension and it was not included as an asset in the settlement when they did divorce.

Significantly worse off in retirement

Worryingly, almost one in twelve (8%) divorcees say they didn’t have their own pension savings as they were relying on their partner to finance their retirement. As a result of divorce, as many as one in five (19%) say they will be, or are, significantly worse off in retirement. It’s critical that, as part of the separation process, couples take time to think about and discuss one of their single most valuable assets, their pension.

To supplement their income following a divorce;

  • a third of divorcees (32%) said they dipped into their savings
  • one in five (20%) used credit cards for everyday living expenses
  • a similar number (18%) borrowed from friends or family
  • and just over one in seven (15%) regularly sold clothing/toys/other household items just to make ends meet.

Future retirement income at risk

One in eight (12%) respondents admitted to having to go out to work, having not worked before their divorce, or get a second job (10%). Worryingly, one in eight (12%) also cut back, or cancelled, their pension contributions – putting their future retirement income further at risk.

There are several options available to the Family Court when dealing with pensions and divorce – pension sharing, earmarking and offsetting against other assets[5]. It can often be a very complex issue so, as well as hiring a family lawyer, couples should consult a professional Financial Adviser to walk them through the pension valuation and financial process.

How can we help with your pension?

If you’re going through a divorce, one of the many things you’ll need to think about is your pension. What will happen to it? Who will get
what? These are important questions to ask, because pensions can be a significant asset in a divorce settlement. If you would like to discuss your options, please contact us.

Source data: The research was conducted by Censuswide between 07/04/2022!13/04/2022, with 1,008 respondents who have been through a divorce in the UK. Respondents are referred to as divorcees or divorced people throughout.

[1] Divorces in England and Wales – Office for National Statistics (ons.gov.uk)
[2] New divorce laws will come into force from 6 April 2022 (gov.uk)
[3] Total wealth: Wealth in Great Britain (ons.gov.uk)
[4] Divorces in England and Wales – Office for National Statistics (ons.gov.uk)
[5] Aviva Adviser: Pension and Divorce (avivab2b.co.uk)

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

Gender Pension Gap Industries

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The industries that have the largest gender pension gap

  • 59% Healthcare
  • 51% Construction
  • 48% Real estate/property development
  • 46% Pharmaceutical
  • 46% Aerospace, defence and government services
  • 45% Senior care

Women Seeking Financial Support

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Financial Planner, Carol Lammy-Steele, discusses why women are less likely to seek financial support from a Financial Adviser.

Gender Pensions Gap

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Women’s pensions at retirement are half the size of men’s

The gender pensions gap is the difference in the average amount of money that men and women have saved for retirement and it begins at the very start of a woman’s career.

Women are more likely to take breaks from work to raise children or care for relatives, which can reduce their earnings and pension contributions over time. They also tend to live longer than men, meaning they need to have enough saved to last them through retirement.

As a result, women’s pensions at retirement are half the size of men’s, regardless of the sector they work in,
research has highlighted[1].

Long-term financial impact

The research found that every single industry in the UK has a gender pensions gap, even those dominated by female workers. Considering women are likely to live four years[2] longer than men, this issue deepens as they need to have saved around 5% to 7% more at retirement age.

Worryingly, more than a third (38%) of women who have taken a career break were not aware of the long-term financial impact it would have on their pension.

Three key industries

According to the research, the gender pensions gap exists regardless of average pay across different sectors, and ranges from a gap of 59% in the healthcare industry to 13% in courier services.

The healthcare (59%), construction (51%), real estate/property development (48%), pharmaceutical (46%), aerospace, defence and government services (46%) and senior care (45%) sectors were found to have the largest gender pensions gaps.

Of these six sectors, three are key industries for female employment – healthcare, pharmaceuticals and senior care[3]. There are many reasons for the gender pensions gap, ranging from women holding fewer senior positions and being paid less, resulting in lower pensions contributions, to the fact they are more likely to take career breaks due to caring responsibilities.

Gender confidence gap

Another potential driver is a significant gender confidence gap when it comes to managing pension pots. More than a quarter (28%) of women said they had confidence in their ability to make decisions about their pension, compared to almost half (48%) of men[5].

This lack of confidence extends further to other $nancial decisions, with women less likely than men to feel confident managing their investments (22% of women versus 41% of men) and their savings (56% of women versus 67% of men).

While many factors behind the gender pension gap are out of most people’s control, there are some actions you can take to help reduce it:

  • Contribute as much as you can to your pension – and start early.
  • Compound interest remains hugely underrated and poorly understood by both some men and women.
  • Check the charges on your historic pension pots. If appropriate, see if consolidating your pots will bring them down.
  • Check how much your State Pension will be and when you’ll get it. If it’s not going to support your ideal lifestyle, plan how you’ll cover any shortfall.
  • Put a bit more into your pension whenever you get a pay rise.
  • Talk through your pension planning with your partner. Make sure you know about each other’s saving plans, contribution limits and that you are both on the same page.
  • Keep a regular eye on your pension to make sure you’re in full control of it and saving for your ideal future.

There are a number of ways to close the gender pensions gap. Employers can offer flexible working arrangements that allow women to balance work and family life. Governments can also provide tax incentives for pension contributions. And finally, individuals can look to save
more for retirement.

Source data:
[1] The analysis is based on LGIM’s proprietary data on c.4.5 million defined contribution members as at 1 April 2022 but does not take into account any other pension provision the customers may have elsewhere.
[2] ONS: Life expectancy at birth in the UK: 82.9 years for women vs 79 years for men; Office for National Statistics, 2018–2020. Average four years.
[3] According to the ratio of female members across the Legal & General book of business.
[4] Legal & General Insight Lab survey of 2,135 workplace members was conducted between 4–26 July 2022.
[5] Opinium survey of 2,001 UK adults was conducted between 4–8 February 2022.