Pensions

The Golden Years?

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Be better off in retirement

Imagine you’re retiring today. Have you thought about how you’re going to financially support yourself, and potentially your family too, with your current pension savings? The run-up to your retirement may feel overwhelming, but this is an important time for you and your savings.

Following the pensions reforms, there are now more options available than ever and this has removed the compulsion to purchase an annuity. It also means that you can use your pension fund to benefit your named beneficiaries, whoever they may be.

Basic retirement lifestyle

If you are approaching retirement it’s time to think about what you’re going to do with the money you’ve been working hard to save all these years. The average UK pension pot after a lifetime of saving stands at £61,897[1]. With current annuity rates, this would buy you an income of only around £3,000 extra per year from age 67, which, added to the maximum State Pension, makes just over £12,000 a year – just enough for a basic retirement lifestyle.

In more recent years, when it’s time to take a retirement income, some people are choosing to do so through pension drawdown. Pension drawdown provides a way to establish a flexible income, set at whatever level you choose, which can be increased or decreased over time to match your needs.

Flexibility and control

For many, this may seem a more fitting solution to their retirement needs than purchasing an annuity, which is a more established option that typically offers a set monthly income for life. However, although pension drawdown offers flexibility and control, there are differences to consider.

While annuity income is fixed for life, pension drawdown can only continue for as long as you have savings remaining – and once they’re gone, you’ll receive nothing. So, it’s important to receive professional financial advice to ensure that you withdraw your money at a rate that will last your expected lifetime.

Will your savings last a lifetime?

It’s important to consider that your retirement could last for 30 years or more, depending on when you retire and how long you live. This is why some people use pension drawdown as the option to provide their retirement income. Your savings remain invested even after you retire, which means they have the opportunity to continue growing through investment returns.

But it’s impossible to predict exactly how much they will grow each year. Some years they will grow more than others, and some years they may fall in value. If your rate of withdrawal exactly matched your growth rate, your savings could last indefinitely. But, because growth is so hard to predict, this is near impossible to do.

How much can you safely withdraw?

A 4% withdrawal rate is typically stated as a guide for how much you can withdraw each year from your retirement savings. This figure is estimated based on the history of the financial markets and how much investments have tended to grow over periods of around 35 years (the expected duration of retirement for someone who retires in their sixties).

So, if you have £500,000 in savings when you retire, 4% would initially equate to £20,000 a year.

However, there are a few additional details that mean this figure can’t be used totally reliably:

  • Past performance of the stock markets cannot reliably predict future growth
  • The performance of investments in your portfolio may be better or worse than average
  • It’s impossible to know for sure how long your retirement will last
  • Your financial needs are likely to change over time, typically peaking in early retirement and then in later life

Changing pensions landscape

So, a 4% rate of withdrawal could be either overly cautious, resulting in the accumulation of wealth that could create an Inheritance Tax
liability, or overly reckless, resulting in complete depletion of your savings when you still have years left to live.

In this world of ours, very little stands still. The same can be said for the pensions landscape. As high earners are faced with even more restrictions and potential pitfalls, it is vital to understand the rules and seek specialist advice. Start talking to us today about your future retirement plans and we can help you make sure it’s a resilient one.

Building a better retirement

If you’re approaching or have already turned 55, you might be wondering what is a good pension pot value to aim for. This will naturally
depend on your circumstances. To discuss your requirements, please contact us.

Options at retirement

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Options at retirement

Annuities – guaranteed income for life

Flexible retirement income – pension drawdown

Uncrystallised Funds Pension Lump Sum

Combination – mix and match

a couple happy at their options at retirement

Pension options at retirement

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a couple happy at their options at retirementWhat can I do with my pension?

Deciding how you want to start taking money.

Due to the changes introduced by the government in April 2015, when you reach the age of 55 (subject to change) you now have more flexibility than ever when it comes to taking money from your pension pot.

But before you do anything with your hard-earned cash, it’s important to take the time to understand your options, as the decisions you make will affect your income in retirement. Before you take money from your pension plan, it’s important to ask yourself if you really need it right away.

When and how you take your money can make a big difference to how much tax you might pay and how long your money will last.

Most pensions will set an age from which you can start taking money from your pension. They will also have rules for when you can
take your pension earlier than normal, for example, if you become seriously ill or unable to work.

When the time comes to start taking money from your pension, you’ll need to decide how you want to do this. If you’ve got a personal
pension or a defined contribution pension, you can take up to 25% of its value as a tax-free lump sum.

The remainder of your pension fund will be taxable and may either be taken as cash, used to buy an annuity (a guaranteed income for a
specific period or for the rest of your life), or you may leave the money invested and take withdrawals on a regular basis or as and when
you need.

With a defined benefits pension, you may be able to take some of its value as a tax-free lump sum, but this will depend on the rules of your scheme. The rest of the money will be paid to you as a guaranteed income for the rest of your life.

Different levels of risk and security and potentially different tax implications

The different ways of taking your money have different levels of risk and security, and potentially different tax implications too. As with all retirement decisions, it’s important to take professional financial advice on what’s best for you.

Everybody’s situation is different, so how you combine the options is up to you.

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.

The amount you will receive depends on a number of factors, for example, how long the insurance company expects you to live and other benefits the annuity provides, such as a guaranteed payment period or payments to a spouse or dependent.

Annuities can also be for a specific period, not just for life. This can be useful if someone wants a guaranteed income for part of their retirement, say before the State Pension is payable.

Flexible retirement income –pension drawdown

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

Pension drawdown normally allows you to draw 25% of your pension fund as a tax-free lump-sum, or series of smaller sums. This ‘tax-free cash’ is known as the Pension Commencement Lump Sum, or PCLS. The rest of the fund remains invested and is used to provide you with a taxable income, via withdrawals on a regular basis or as and when you need.

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.

Uncrystallised Funds Pension Lump Sum (UFPLS)

You do not have to draw your pensions commencement lump sum at the outset. Instead you may use your pension fund to take cash as and when you need it and leave the rest untouched where it can continue to grow tax-free.

For each withdrawal, the first 25% (quarter) is tax-free and the rest counts as taxable income. There might be charges each time you make a cash withdrawal and/or limits on how many withdrawals you can make each year.

Combination – mix and match

It may suit you better to use a combination of the options outlined 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 wish, and 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.

Want to discuss how to decide what to do with your pension pot?

Find out more about your options for taking an income in retirement and what you need to consider. If you’re unsure about the best approach for you, please get in touch with us for further information.

Pension Allowance

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Pension Allowance

The maximum amount of contributions on which a member can claim tax relief in any tax year is greater of:

  • the ‘basic amount’ – currently £3600 gross, and
  • the amount of the individual’s relevant UK earnings that are chargeable to income tax for the year.

Lifetime Allowance

Tax Year Amount
2016/17 to 2017/18 £1,000,000
2018/19 £1,030,000
2019/20 £1,055,000
2020/21 to 2025/26 £1,073,100

Lifetime Allowance Charge: 55% on excess paid as a lump sum and 25% on excess designated for drawdown, annuity or scheme pension.

Annual Allowance

Tax Year AA Amount MPAA Amount
2016/17 £40,000* £10,000
2017/18 to 2022/23 £40,000* £4,000

Annual Allowance Charge: Marginal income tax rate on excess, subject to a minimum of 20%.

Carry forward of up to three years unused annual allowance available.

Money Purchase Annual Allowance (MPAA): applies with no carry forward to money purchase pensions once flexible pension income taken from 2015/16.

*Tapered annual allowance: from 2016/17 to 2019/20, tapered by £1 for every £2 of ‘adjusted income’ over £150,000 to a minimum of £10,000 if ‘threshold income’ is also over £110,000.

For 2020/21 to 2022/23, tapered on the same basis if adjusted income over £240,000 and threshold income over £200,000 to a minimum of £4,000.

Pension Lifetime Allowance Q&A Infographic

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If you are a high-income earner or wealthy individual, you could be putting too much into your lifetime pension and risk exceeding the pension lifetime allowance.

Pension Lifetime Allowance Q&A

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How to stay within the limit to avoid a tax charge.

If you’ve been diligently saving into a pension throughout your working life, you should be entitled to feel confident about your retirement.

But, unfortunately, the best savers sometimes find themselves inadvertently breaching their pension lifetime allowance (LTA) and being charged an additional tax that erodes their savings.

The following questions and answers are intended to help you avoid this tax charge.

Q: What is the lifetime allowance?

A: The LTA is a limit on the amount you can withdraw in pension benefits in your lifetime before you trigger an additional tax charge. By pension benefits, we mean money you receive from your pension in any form, whether that’s a lump sum, a flexible income, an annuity income or through any other method. This allowance applies to your total pension savings, which may be in different pensions.

Q: How much is the Lifetime Allowance?

A: In the 2021/22 tax year, the LTA is £1,073,100. This allowance has now been frozen until April 2026.

Q: What happens if you exceed the Lifetime Allowance?

A: Once you have received your full LTA in pension benefits, you will be required to pay an additional tax charge on any further benefits you receive. If you take your remaining benefits as a lump sum, you’ll pay a tax charge of 55%. If you take your remaining benefits as multiple  withdrawals, you’ll pay a tax charge of 25% on each one.

Q: How is the usage of your Lifetime Allowance measured?

A: Each time you access your pension benefits (for example, by purchasing an annuity, receiving a lump sum or establishing a flexible income), this is recorded as a ‘benefit crystallisation event’. There is an additional benefit crystallisation event when you turn 75, and finally, upon your death.

Q: Is Lifetime Allowance protection available?

A: You can only protect your pension from the LTA if your savings were worth more than £1 million on 5 April 2016. You may be able to
protect your pension savings up to £1.25 million, or up to the value of your pension on that date, depending on the type of protection you have.

Q: Is it possible to avoid the Lifetime Allowance?

A: If you do not have LTA protection and you are approaching the limit, there are various actions you can consider. These include stopping your contributions (and, instead, investing your money into an alternative tax-efficient environment), changing your investment strategy or starting retirement earlier.

Q: When should you seek professional advice?

A: The rules around the LTA are very complex and making the right decisions can feel difficult. Receiving professional financial advice will help to identify if you have a problem and offer different solutions to consider, based on a full review of your unique circumstances.

Let us help you make the most of your money – and your future

Everyone deserves a great retirement. Your goals and ambitions are unique to you and we want to help you get there. To discuss your retirement plans, please contact us. Visit our pension Lifetime Allowance page for more information.

Mind the pension gender gap

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The pension gender age gap Women are being urged to think about their long term savings

Women are still behind men when it comes to retirement savings, which is why they need to consider the pension gender gap.

Imagine reaching retirement age and discovering that, despite years of saving, you don’t have enough money to get by. Worse still, suppose you’re unable to pay for the right kind of care in your old age.

If you and your partner separate or your spouse dies unexpectedly – will you have sufficient funds to see you through retirement? Now, all of these might sound like worst-case scenarios but, unfortunately, for women right across the UK one or more of them could become a reality.

Earning trends

The ‘Women and Retirement’ report[1] has found that if current work and earning trends continue, young women today will need to save an average of £185,000 more during their working life to enjoy the same retirement income as men.

The colossal gender pension gap is made up of a savings shortfall, plus the need to fund a longer retirement because women on average live longer than men. This also leads to higher care costs. Many women will naturally take time o! to start a family – resulting in gaps in their work history.

And even if women remain in the workforce, some still tend to earn less than men, on average.

Vulnerable situation

21% of women surveyed said they plan to rely at least partly on their partner’s income in retirement. However, this can leave women in a particularly vulnerable situation should they separate from their partner.

Right now, it’s rare for divorce settlements to account for pension assets, which means that women could end up in particularly unstable financial situations following divorce.

Funding retirement

Also, women tend to live longer than men – two to three years, on average. Indeed, this continued rise in longevity means that a 25-year- old man today can expect to live to 86, while a woman can live to 89.

And while rising longevity is of course a good thing, it does raise specific challenges – especially when it comes to funding retirement and old age.

Living longer

Together with living longer, women are also more likely to need care when they’re older. In fact, of the 6 million people in the UK over the age of 60 currently living with a disability, 3.5 million of them are women.

And those women who do need care spend on average a year longer in care homes than men. Right now, the average cost of care is £679 per week, which means women would need an extra £35,000 during retirement for residential care costs.

Moreover, as women can expect to live two to three years longer than men, they would also need around £50,000 for their retirement – bringing the total amount needed to match a man’s retirement income to £185,000.

Concerned about the gender pension gap?

As a woman, your pension is a key part of your retirement planning. How much you put away now, how you invest for the future and how you choose to access your pension once you’ve stopped working, are all key considerations for anyone hoping to enjoy a long and happy retirement. If you have any concerns or questions about your retirement plans, please contact us for more information.

Source data:

[1] Scottish Widows 2021 ‘Women and Retirement’ report – research carried out online by YouGov Plc across a total of 5,059 adults aged 18+. Data weighted to be representative of the GB population. Fieldwork was carried out between 23 March and 3 April 2021 through an online survey. 5,059 interviews were carried out. The sampling criteria were based on four key metrics: age, gender, region and social grade.

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 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.

Staggered Retirement

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A more popular and increasingly common option many are considering.

Giving up the 9-to-5 doesn’t necessarily mean stopping work. But retirement planning has taken on an entirely new dimension as a result of the COVID-19 pandemic outbreak with many big questions being asked. When you picture yourself in your golden years, are you sitting on a beach, hitting the golf course, or still working behind a desk? For many people of retirement age, continuing to work is an option they are considering. Increasingly people are planning to stagger work or work flexibly. This can really appeal to some individuals who have caring responsibilities or health issues, or who are thinking about retiring in the next few years. 

Sudden transition from working five days a week

Several decades ago, working and retirement were binary terms, with little overlap. People were either working (and under the age of 65) or had hit the age of 65 and were retired. That’s no longer true, however, as staggered retirement is becoming more popular and more common.

Few people benefit from the sudden transition from working five days a week to not working at all. Retirement can often be an unsettling period and it’s not surprising given that the most common path into retirement is to go ‘cold turkey’ and simply stop working. 

More flexible retirement and working part-time

New research has highlighted the fact that fewer people are deciding against completely stopping working and are opting for a staggered and more flexible retirement and working part-time[1]. Nearly one in three (32%) pensioners in their 60s and 16% of over70s have left their pensions untouched. And of those who haven’t accessed their pension pot, nearly half (48%) of those in their 60s, and 24% of over-70s, say it is because they are still working. With people living longer, and the added prospect of health care costs in laterlife, retirees increasingly  understand the benefits of having a larger pension pot in later life.

Pensions are required to last as long as possible

Of those who haven’t accessed their pension pot, half (51%) say it is because they are still working while more than a quarter (25%) of people in their 60s say it is because they want their pensions to last as long as possible. Of course, retirees who haven’t accessed their pension pot must have alternative sources of income. When asked about their income, nearly half said they take an income from cash savings (47%), others rely on their spouse or partner’s income (35%) or State Pension (22%) while 12% rely on income from property investments added prospect of health care costs in laterlife, retirees increasingly understand the benefits of having a larger pension pot in later life. 

Offering people different financial and health benefits

This trend for staggered retirements offers many financial and health benefits. It is often taken for granted but continued good health is one of the best financial assets people can have. The benefits of working – such as remaining physically active and continued social interaction – can make a big difference to people’s mental wellbeing and overall health in retirement. People are increasingly making alternative choices about retirement to ensure that they do not run out of money, but it’s also really important to make pension savings work past retirement age so as not to miss out on the ability to generate growth above inflation for when there is the requirement to start drawing a pension. 

Worried about retirement uncertainty?

Planning your financial future is one of the most important things you can do in your life. Do you require professional advice and help with your retirement planning during this difficult time? Speak to us to find out how we can help you.

Guide to the final countdown

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Time to review your financial plans with a financial check-up? 

If you are aiming to retire within the next five years, it’s time to get into the mindset of considering the practicalities of fulfilling your desired lifestyle and making plans. While you should think about retirement planning as early as possible, the five years leading up to retirement are critical. 

Retirement may be looming with terrifying urgency, and the reality is that you have just 60 pay packets left until you retire. This is a time when you’ll need to obtain up-to-date pension forecasts and obtain professional financial advice to make sure your retirement plans are on track. So, if you believe you are five years or less away from retirement, now is the time to seriously review your financial plans with a financial check-up.

What are the key things to concentrate on?

 The first step is to ask yourself if you are actually ready to retire. There are many factors to consider. Your financial affairs are the big factor to begin with. Your ability to afford retirement depends on your lifestyle, your family situation and home ownership. If you have dependent children, or have 15 years left on your mortgage, the time might not be quite right. You have to ensure retirement is the right move for you. Work can be stressful, but it can be rewarding and give you a sense of achievement. People may miss the routine of working life and the day-to-day interaction with people. 

Taking a different path

What you need might not be retirement, it could be change. A chance to get out from behind your desk to do something meaningful. Perhaps retirement is your ticket to achieving this – taking a different path where money is no longer the prime motivation. 

If you are afraid about having time on your hands after retirement, explore options for filling it well before you take the leap. 

Major change in lifestyle  

Retirement means a major change in lifestyle. You need a clear mind as to what you want your life to look like and how to spend your time. Then you can work on arranging your finances to suit. 

Decide on your priorities for retired life. Do you want to travel, or split your time between home and somewhere hot and exotic? Is there a particular hobby you want to immerse yourself in? What kind of leisure and social activities matter to you? 

Later years in your retirement

Try not to get caught up in what happens right after you end work – also consider the later years in your retirement. Will long-term travel continue to be feasible as you get older? Will you need such a large house, or will it become a burden? And what about in the latter stages of life? Would you need to fund care?  

You must also have a clear picture of what kind of life you would like to lead in retirement and what it will cost. Then you can start to dig a little deeper into what you might be able to afford. This means getting to grips with your sources of income once your earnings stop. 

Request up-to-date forecasts

Your first port of call is your pension – or pensions. Contact previous pension trustees to request up-to-date forecasts. If you’ve lost details of a pension scheme and need help, the Pension Tracing Service (0800 731 0193) may be able to assist you.  

You should also find out what your likely State Pension entitlement would be – you can do this by completing a BR19 form or by visiting www.direct.gov.uk. 

Consolidate existing pensions

If you have personal pensions, you need to find out where they are invested and how they have performed. Also check if there are any valuable guarantees built into the contracts. It may make sense to consolidate existing pensions, making it easier for y ou to keep track of everything and reduce the amount of correspondence you receive.  

With investments in general, it is important to review your strategy before you take the leap into retirement. You don’t need to suddenly become an ultra-conservative investor – you still want your portfolio to grow over the next few decades. Should the investment markets make a correction, you may want to limit your downside. Don’t forget, there may be another 30 years ahead. 

Don’t put off confronting the truth

If your investments don’t look on course to give you the income you’d hoped for in retirement, don’t put off confronting the truth. You may need to revise your projected living costs. Alternatively, there’s still time to change your investments, and you could also cut back on spending while you are still earning to generate more savings.  

Your income can be used in other ways besides topping up your savings as you prepare for retirement. Clearing debts, including your mortgage, should be a priority before you retire. Whatever you owe on credit cards and loans, focus on paying off the debt that charges the most interest first. Debt will be the biggest burden once you do not have a regular working income. 

Consider re-adjusting your finances

Having no mortgage to pay is a major step towards re-adjusting your finances for a post-salary life. You might also decide you want to sell up, whether to downsize, to give you a lump sum of cash to live off, or to fund your dreams of moving abroad. Either way, use your working income while you can to improve your home, maximising potential revenue when you come to sell it.  

Finally, retirement is a huge change, both personally and financially – so big it might be too much to take in all at once. It makes good sense to practice at being retired before it becomes a reality, especially if you will have to make certain adjustments and sacrifices to compensate for a reduced income. You might even consider a phased retirement, cutting back on your hours gradually. This will not only soften the financial effect, but it will also get you used to having more spare time to fill. 

Are you planning to enjoy your retirement?

One of the most important stages in life which everybody has to save for is retirement. You work hard to enjoy your current lifestyle, but are you doing enough to ensure that you can continue to enjoy it in your retirement?

If you would like to review your situation or arrange a meeting to discuss your retirement planning options, please contact us for further information – we look forward to hearing from you.

Retiring happy

Retire Happy

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Retiring happyPlanning your future has arguably never been more important.

10 tips to enjoy the retirement you want

  1. Review your spending habits and consider if you have the scope to save a little more each month.
  2. Look up your annual benefit statements – you may have saved with more than one employer’s pension scheme.
  3. Think about what financial milestones you’d need to reach in order to increase your pension contributions and review your investment choices.
  4. Find out more about your current pension plan. If you pay in more, does your employer match your contributions?
  5. Track down old pension schemes using the government’s finder service https://www.gov.uk/find-pension-contact-details. Or request contact details from the government’s Pension Tracing Service on 0800 731 0193 or by post.
  6. Check that your Expression of Wish form is up to date. This is a request setting out whom you would like to receive any death benefits payable on your death.
  7. Check your State Pension entitlement. To receive the full State Pension when you reach State Pension age you must have paid or been credited with 35 qualifying years of National Insurance contributions. Visit the Government Pension Service https://www.gov.uk/contact-pension-service for information about your State Pension.
  8. Add up the savings and investments that you could use for your retirement. A pension is a very tax-efficient way to save for your retirement but you might also have other savings or investments that you could use to increase your income when you retire.
  9. If you’re getting close to retirement and the amount you’re likely to retire on is less than you’d hoped, consider ways to boost your pension.
  10. Decide when to start taking your pension. You need to set a target date when you want to start drawing an income from your pension – and remember, you don’t have to stop working to take your pension but you must be aged at least 55 (you might be able to do this earlier if you’re in very poor health).

Please contact us if you require any further information or guidance on your retirement.