What different types of pensions are there?
The information below shows a breakdown of your pension options.
Source: www.finder.com/UK-pension-statistics
Source: https://www.gov.uk/workplace-pensions
Source: https://www.yourpension.gov.uk/
Source: https://www.raconteur.net/finance/pensions/young-people-pensions/
Source: https://www.ipse.co.uk/ipse-news/ipse-blog/how-much-should-i-pay-into-my-pension.html
How much is your IFA business really worth?
This article first appeared in Professional Adviser.
A lot of factors contribute to the value of a financial advice business. I take a look at some of the most important elements, including succession planning, liabilities and quality of data...
The age-old way of valuing an IFA firm is based on recurring income - typically between two to four times the annual amount - but there are major flaws in this rule of thumb in today's market.
With the average age of advisers in the UK continuing to rise, selling to an adviser partnership, consolidator, or aggregator has become a key means of allowing business owners to retire and realise value in firms they have worked to build up over many years.
While a calculation based on recurring income might show what's being brought in from existing clients, it does little to demonstrate the future growth potential of a business, which is what any savvy acquirer will be looking for.
What's more, we're hearing of more and more IFAs being drawn in by firms quoting hugely attractive initial valuations based on recurring income, only to be paid out much less when it comes to signing on the dotted line.
This lack of transparency among a few firms presents a whole other issue, but serves a need to establish a more realistic standard for IFAs to value their own firm - such as the EBIT, or adjusted EBIT model - to ensure they are equipped with the knowledge to secure the best deal with a buyer.
It is also essential to understand how the acquirer defines adjusted EBIT. What costs are included or excluded when quantifying the real underlying profitability?
Aside from this, there are numerous lesser-known factors that will impact the final amount an acquirer is prepared to offer. Business owners should be taking these into account before even entering a conversation about a potential sale.
Quality of data
If your data isn't up to scratch, then you may well be looking at around a 25% reduction in the ranges of what a buyer is prepared to offer.
You simply cannot present your business in the best possible light without strong data around it: this is the only way you can demonstrate the profile of your clients and the ‘stickability' of your firm's assets and revenue.
This applies to all aspects of the business, including being able to demonstrate progression of new business and growth potential. For example, can you show where new business comes from? If it comes through client recommendations or third parties and professional connections, you need to show how this is tracked and measured.
Succession planning
Ultimately you want to be able to show that your business can run - and keep thriving - without you. If you can do this, then you're already ahead of the game.
Look at it from the acquirer's point of view: do clients have a relationship with the business as a whole, or is it largely with one individual?
Aside from being able to show that clients have multiple contact points with other people in the business - from administrators to paraplanners etc. - the aim is to demonstrate that you have named successors in place, with the potential to keep building that wider relationship with your brand and keep it growing over the long-term.
If you don't have that infrastructure available, then you will need to be realistic in terms of what that means. Are you prepared to accept a 25% reduction for an immediate cash sale, or would you prefer to go for a phased sale and stick around to manage the transition phase?
Liability considerations
It goes without saying that an acquirer will want to de-risk as much as they can, so another consideration is whether or not you will just sell the goodwill of your business or the company and equity as a whole.
Selling just the goodwill (client data, contracts, recurring income etc.) essentially means retaining the liability of past business undertaken. Sellers prepared to maintain liability send a clear signal that they are confident that the business is sound enough to warrant minimal complaints, which can help you attract a more competitive price. A word of caution though, the regulator has the power to ‘see through' a transaction and decide where it sees the liability resting. A consideration which is equally important for both seller and buyer.
Understandably, a lot of sellers want to relinquish all liability and simply walk away with an equity payment, though it is rare that the seller wouldn't insist on indemnities and warranties.
While some of the above factors are easier to analyse than others, and every buyer will prioritise some more than others, being aware of how each could impact a valuation will place you in far stronger stead to secure the most competitive deal.
Could the State Pension be in line for a bumper increase?
The State Pension looks set to rise by a record amount, but Chancellor Rishi Sunak may have other plans for it.
The State Pension could be in line for a bumper hike this year thanks to distortions in the way its increases are calculated through the so-called ‘triple lock’. The triple lock was conceived during the Coalition Government’s early days as a protection to ensure the State Pension always rises – either by matching the rate of wage growth, inflation or 2.5% - whichever is higher.
However, the triple lock has come under criticism in recent times for its perceived lack of fairness. In times such as 2020 when wage growth was plummeting thanks to the COVID-19 crisis, pensioners enjoyed a healthy 2.5% rise as this was higher than both wage growth and inflation at the time.
Now the situation has become even more distorted as wage growth is sky high – around 7.3% at the most recent set of figures from the Office for National Statistics (ONS). The ONS itself concedes that this may not be truly reflective of the average growth in wages as the low levels of last year, plus the effects of the furlough scheme, have put the data way out of whack.
But thanks to the way the triple lock is set out this may not matter, leaving pensioners with a bumper pay rise.
However, sources in the Government are now intimating that Chancellor Rishi Sunak could be set to thwart the triple lock in the interest of preventing an expensive hike in the Treasury’s bills.
It would make for a fairly extraordinary intervention to break the triple lock. The suggestion is that the Chancellor will likely make it a temporary fix thanks to the unforeseen circumstances, but calls for a double lock to be made permanent have been heard for some time now.
Does the State Pension matter?
The State Pension, while a relatively modest sum on the face of it, is an incredibly important consideration for all but the wealthiest retirees. In later life it can account for a significant sum.
Currently paid at a rate of £179.60 a week from age 67, it forms a core part of many retiree’s later life income. With an uplift on the cards of, conservatively, 7.3% - pensioners could see an extra £629 per year. Some estimates suggest the month when the news uplift is calculated could lead to an 8.5% rise – which would mean an extra £729 next year.
Former pensions minister Steve Webb, who put the triple lock into law and is now a partner at Lane Clark & Peacock, says: "The Chancellor will no doubt be considering a wide range of options to avoid a hike in the state pension. Dropping any earnings link would be quite controversial as ‘restoring the earnings link’ has always been a rallying cry for the pensioner movement.
"It would also be an explicit breach of the Conservative manifesto. I suspect that a modified earnings figure will remain the most attractive option to a Chancellor who will want to avoid opening up battles on too many fronts at the same time."
If you’d like to discuss the issues raised in this article more, don’t hesitate to get in touch with your adviser.
Why your household bills could be about to soar – and what to do about it
Household bills could soar by up to £400 a year as the Government tries to find ways of funding its ‘net zero’ pledge by 2050, a new report has claimed.
The National Infrastructure Commission (NIC) says the Government needs to invest heavily in greenhouse gas removal technologies if it is to meet that target. It estimates that investment will cost the taxpayer up to £400m over the next decade, but argued that the most polluting industries, such as shipping, aviation and agriculture should pay £2bn a year from 2030.
However, the NIC acknowledged that this cost would likely be handed down to consumers in the form of higher food, transport, goods and energy bills. It estimates that the lowest earners are likely to see their bills rise £80 a year by 2030, with the highest earners having to fork out up to £400 more a year.
However, you can offset those costs by making some small money-saving changes elsewhere.
Here are just some of the ways you can trim your outgoings.
- Cut your utility bills: the average dual fuel energy bill costs £1,131 a year, or £94.35 a month, according to Ofgem. However, you can cut hundreds a year off your bill by only using the heating when necessary, turning off lights when you leave a room, using energy efficient lightbulbs and making sure your boiler is serviced regularly. You could also save a lot of money by shopping around for the best energy deal by using a comparison site.
- Check you’re not overpaying on council tax: More than 400,000 homes are currently in the wrong council tax band and are therefore overpaying, according to TV money expert Martin Lewis. It is thought that some homes have been in the wrong band since the current system was introduced in 1991. However, if you have overpaid, you might be able to claim a discount on future payments. Click here to find out how.
- Use the car less: Petrol prices hit an eight-year high in June after eight consecutive monthly increases, according to motoring organisation RAC. With the average annual fuel bill standing north of £1,000, you could save a small fortune by opting to walk or cycle to work instead.
- Reduce your debt interest payments: According to The Money Charity, the average UK resident has nearly £2,000 in credit card debt. If you’re paying high rates of interest on your loans and credit cards, look to see if you can shift them onto a card charging 0% interest. That way, your monthly repayments are paying down just the debt, rather than the interest.
- Cancel unused memberships and subscriptions: Have a gym membership that you never use? Or perhaps paying for Netflix when you rarely watch television? Then you might want to consider cancelling them. But make sure you check you’re not locked in and liable for any early cancellation fees first.
If you’d like to discuss additional ways to make your money work harder, don’t hesitate to get in touch with your adviser.
What the proposed 1% hike to National Insurance would mean for your money
The Government is reportedly planning to hike National Insurance by 1% to pay for social care, in a move that could leave workers hundreds of pounds a year worse off.
The increase would result in workers having to pay more in tax, meaning they would have less disposable income to spend each month. It has been reported that the plan could raise more than £10bn in additional tax revenue to help the Government pay for the rising care costs of the UK’s ageing population.
While the policy is likely to be unpopular, experts say it would result in fewer people having to sell their homes to pay for care in old age. However, critics argue a hike to National Insurance is the least fair way of solving the problem, as it would hit lower earners hardest.
Also, as retirees do not pay NI, it would also mean the burden of funding social care would fall entirely on workers, which again would likely be very unpopular.
Here we explain what the proposal would mean for your finances.
How does National Insurance work at present?
NI raises around £150bn a year for the Treasury’s coffers, making it the second biggest earner after income tax.
It is used mainly to pay for state benefits, such as the state pension, statutory sick pay, maternity leave and unemployment and disability benefits.
Workers do not pay NI until they earn £9,568. You then pay 12% of your earnings between £9,568 and £50,270, and 2% for anything you earn over this amount. The self-employed pay lower amounts of NI.
However, if the Government presses ahead with its plans, those rates would rise from 12% to 13% and from 2% to 3% respectively.
How would it affect me?
How much you pay in NI is linked to how much you earn, meaning the higher your salary the bigger your contribution. Figures calculated by accountants Blick Rothenberg for The Sun reveal that someone earning £15,000 a year would see their NI contributions rise by £54 a year to £706.
Someone on £25,000 – slightly under the median national salary of £29,900 – would see their NI bill rise £154 to £2,006.
If you earn £50,000 a year, your NI bill would rise by a whopping £404 to £5,256, while someone earning £75,000 a year would see theirs jump by £654 to £6,033.
How likely is it that the hike will happen?
While the Conservatives ruled out increases to income tax and NI in their 2019 election manifesto, these are exceptional times.
Chancellor Rishi Sunak has publicly stated the need to balance the books and to find a way to pay off the enormous amount of debt that the Government has taken on since the start of the current crisis.
So, while the move might be unpopular, the Government could argue it is necessary to get the public finances back on an even keel.
Having that said, there’s a possibility the Chancellor may well tweak his plan to introduce a blanket NI increase, especially if there is a backlash among Conservative MPs and workers.
If you’d like to discuss the topics mentioned in this article further, don’t hesitate to get in touch with your adviser.
Pension Freedom age set to rise, do you need to change your plans to prepare for it?
The age at which you can take your pension is set to rise, but how might that affect your long-term plans?
From 2028 the age at which you can take your pension is set to rise. The Government confirmed on 20 July 2021 that the Pension Freedom age will rise from 55 to 57 at the end of the tax year April 2028. This means pension holders will have to wait longer to access their savings. The changes are set to be enacted alongside the rise in State Pension age, which the Government says reflects the changing nature of the workforce and the need for pensions to last longer into old age.
But how might it affect your retirement plans?
Anyone who was planning on calling it a day on their 55th birthday might want to think again about how their wealth is distributed. Thankfully with plenty of notice from lawmakers, time is on your side. One change you can make to ensure you have quicker access to long-term wealth is to channel more of your savings towards ISAs. ISAs are not subject to the same restrictions as pensions, so you’ll be able to access the money at an earlier age.
However, this could lead to a smaller overall pot as the tax relief that comes with pensions is extremely valuable. In the first instance, you should not divert any money that comes with extra employer contributions attached.
Unfortunately, the Lifetime ISA (LISA) is not an alternative in this instance. Although the LISA offers generous 25% bonuses up to £1,000 each year, you cannot access the money until age 60, even later than pension freedom’s age.
Pension Freedom loophole
There is however a loophole to the rule changes as they stand currently, which could help anyone who doesn’t want to be affected by the new change in the rules. If you have the age of 55 written into the policy of your pension scheme, you will be entitled to access that money age 55 regardless of the law change. This will count for any pension scheme that has age 55 stipulated before April 2023. As it stands this varies between providers, with some set to move the age automatically to 57.
It is worth checking then what the age on your policy is. If you think you’ll want to access the money as soon as possible, you might consider making the small administrative change that could open your pension savings early. However, before doing so you must consider some of the other implications of changing provider or policy – including exit fees, loss of benefits, costs and loss of investment returns, before making a decision.
If you’d like to discuss any of the themes raised in this article about pension freedoms or your pension more generally, don’t hesitate to get in touch with your adviser.
Five questions to ask before signing with a network
This article first appeared in Professional Adviser.
Joining an IFA network is an increasingly tempting option for advisers, but what should you consider before taking the plunge? The key points are assessed below:
The process of joining a network isn't all that dissimilar from an IFA point of view. Why, then, do so many advisers not give their business the same level of care and attention when it comes to selecting a provider?
Joining a network can open huge opportunities for an adviser firm, but how well an individual does as part of one comes down to several things - frequently dependent on their specific needs and objectives.
It is essential to ensure a network's ethos and goals align with your own before signing on the dotted line.
We look at the key questions to ask when meeting a prospective network below.
- What do I get in return for my fee?
An obvious point, but it's important to find out what comes within your fee. This will vary from network to network - and the cheapest is rarely the best.
Every firm will take a different percentage, so the best place to start is by asking what you'll get outside of day-to-day compliance and marketing support.
The key here is to focus on your objectives. If for example, the aim is to grow your business, you may want to ask if you'll have access to strategic counsel.
More importantly, will this counsel be delivered by senior members of the team who understand your business? And will you be able to speak with the same person every time?
Questions such as these will help you understand if you're getting good value for money or not.
- Who ‘owns' clients?
In some cases, the network technically owns the clients, which can of course cause issues for appointed representatives who decide they want to leave.
If you get to keep ownership of clients, make sure to ask about the client data migration process when the contract comes to an end.
You want to ascertain if there are any restrictions to how data is migrated owing to data protection or in-house rules. This will avoid you having to endure a lengthy and onerous exit process or, worse, never being able to regain control of clients due to excess red tape.
- What's the ‘get out' clause?
This is a particularly important consideration, and why it is always worth asking a lawyer to review the contract before you sign.
The key things to check for are excessive notice periods, the retention of fees and other onerous and costly exit terms, such as having to pay run-off cover for things like professional indemnity insurance (PII). Often, something innocuous like the necessity to check a number of files before exit can scupper any plans if it takes months to have those checks carried out.
It's also worth asking for concrete reassurance that the network has the capacity to handle any exit smoothly and efficiently - make sure to get specifics on times.
- Will there be any limitations on the business I can transact?
As the PII market becomes increasingly tougher, a growing number of networks are having to put arduous restrictions in place to obtain their renewal.
If your firm relies on being able to carry out a certain type of business it's particularly important to find out what sort of restrictions could fall on you as a result.
The key here is to be clear and upfront about your expectations at the outset - this will help you avoid any troublesome surprises down the line.
- Why do you want me as an appointed representative?
A conversation with a network should be two-sided, so don't be afraid to ask what it is that attracts them to your business.
Is it simply your client book, or do they see genuine growth potential over the long term?
Every network's culture and ethos will be different, and you will only enjoy a truly prosperous relationship if your values are aligned, and if a firm is genuinely invested in helping you and your clients achieve their objectives.
Each and every network is different and has its own strengths, so the right one will depend on you and your business.
Ultimately whoever you are speaking to should be clear and transparent about the terms of any relationship. The above points will ensure you are equipped to make the best possible decision for the future of your business.
Rishi Sunak’s pensions tax traps: what to expect
With the Government in need of a way to pay for the enormous cost of the pandemic, pensions are perhaps an easy target for the Chancellor.
The Treasury is reportedly formulating plans for a pensions tax raid in a bid to rescue public finances. According to the Telegraph, Chancellor Rishi Sunak and his team are considering three different reforms to pensions tax relief to help balance the books.
Slashing the lifetime allowance
The first of the reforms being considered is a reduction in the pensions lifetime allowance from £1.073m to £900,000 or £800,000. At the moment, savers who have pots in excess of the £1.073m are hit with a hefty tax charge of up to 55% when they draw down any amounts above the threshold. If this plan goes ahead, it means thousands of extra savers would be forced to pay steep taxes when they withdraw their pension as their pots would exceed the new lifetime allowance.
Scrapping higher-rate tax relief
This has been under discussion for some time and could see the Treasury introduce a flat pensions tax relief rate of 30% or even lower at 20%. Pensions tax relief is where the Government tops up your pension pot to encourage you to keep saving for your future. With pension tax relief, a portion of the money you would have paid in income tax goes into your pension instead. How much depends on whether you’re a basic or higher rate taxpayer. At the moment, basic rate taxpayers get 20% tax relief, whereas higher rate taxpayers get 40%. That means a £100 pension contribution would cost them just £80 and £60, respectively.
If the Treasury presses ahead with this plan, basic rate taxpayers will benefit but higher rate taxpayers will miss out.
Tax employer contributions
The final measure under consideration is a potential new tax on employer contributions. While the details of this plan are thin on the ground, forcing employers to pay tax on employee pensions contributions would heap costs on firms at a time when the economy is still in recovery mode.
What should I do?
In short, nothing at the moment. At present, we do not know if these plans being kicked around in Whitehall will come to fruition. According to reports, it’s unlikely that we will see any movement until the Autumn Budget in November – if at all. However, if you are already sailing close to the £1.073m lifetime allowance cap, it’s worth speaking with your financial adviser to assess your options. While everybody is different, if this is you then you may be better off diverting your pensions contributions into an ISA instead.
However, it’s always best to speak with a professional before taking such a huge decision which could have major consequences.
Extra savings stashed away during lockdown? Here are some ideas for what to do with it
Brits have stashed away an extra £180 billion in savings during the pandemic. If you built up some extra cash in the last year, here are some ideas for what to do with it.
Brits have stashed away a mountain of cash during the pandemic. It makes sense – people have had to stay home and thus saved money on eating out, going to the pub and big holidays abroad. If you were one of those lucky enough to build up some extra cash during the past 15 months, chances are you’ve asked yourself what you should be doing with it.
Here are four sensible things you can do with your lockdown savings.
Pay down debts
This might be an obvious one, but it’s worth mentioning. While it’s important to have an emergency supply of money, just in case the boiler breaks, it might be worth using some of your excess cash to pay down your debts, particularly if you are being charged lots of interest. If you don’t have any credit card debt or personal loans, it might be worth paying off your mortgage. By doing so, you may be able to reduce your term and therefore the overall level of interest you’ll pay. That might be a sounder idea than leaving it in a savings account earning less than 1%. However, before you do that, check your deal’s terms and conditions to make sure you don’t have to pay any fees for overpaying your mortgage.
Make a rainy-day fund
Once you’ve covered high-interest debts, the next thing to do is build up your ‘rainy-day’ fund. This fund is essential whether you’re working or retired. If you’re working, loss of income from redundancy can have a fast and unanticipated impact on your finances. Saving between three and six months’ worth of your salary is ideal to cover your costs while you look for a new job. If you’re retired, having a rainy-day cash fund can be vital if you’re drawing an income from your pension or ISAs and the markets take a dip. Selling investments to fund your lifestyle in a bad market crystallises losses and will leave your portfolio permanently worse off. Instead, a cash buffer will tide you over while markets recover.
Put it in your ISA or pension
If you have the first two ideas covered already, the next thing to think about is whether that cash can be sheltered tax-efficiently. Make the most of your annual ISA allowance, or even contribute more to your pension. That cash can be put towards investments to grow and bolster your long-term wealth. Saving in cash is only really a good idea if you need the money in the short-term (I.e. for a rainy-day fund). Anything else that is earmarked for long-term wealth growth should be working harder as an investment.
Spend some of it
Finally, it is okay to actually spend some of the money you’ve saved. Of course, do that in a responsible way. Does the dining room need redecorating? Maybe you want to take a quick holiday somewhere warm? Spending money shouldn’t be taboo when it is well-spent (and sometimes going for a slap-up dinner comes under that too!). Just make sure you’ve got your debt under control and your emergency cash pile in place first.
There are of course other tax-efficient considerations to make in this circumstance, such as gifting to loved ones if you are in a position to do so. If you’d like to discuss the ideas mentioned in this article more, don’t hesitate to get in touch with your adviser.
Team GB 50p: can you make a mint from collecting rare coins?
The Royal Mint has introduced a new commemorative 50p coin for the Japan Olympics, but what other rare coins are out there, and could you make money on them?
The Royal Mint has released a new 50p collectors coin to celebrate Team GB at the Tokyo 2020 Olympics. The coin, which sold for £20 on The Royal Mint’s website, proved to be an immediate hit with collectors and is now out of stock, never to enter general circulation again.
At the time of writing, the coin, in its original packaging, was listed for over £35 – just two weeks after first being minted. However, this is far from the only novelty coin of value. If you find what you think is a rare 50p coin – or indeed other denominations, or even vintage money – what should you do with it?
The important thing to remember with rare coins is it is only ever worth what someone is willing to pay for it. Stories routinely pop up in the tabloids about coins selling for hundreds of pounds above face value – but this is quite rare.
As a start it is worth looking at the coins you get back when spending cash in the shops. In COVID times people are less willing to use physical cash meaning the coins in circulation will definitely be less than usual, which can be a good thing for those selling to collectors!
Cash usage has been declining for years but became particularly precipitous during the pandemic, according to UK Finance.
For more dedicated coin collectors a common practice is to go to the bank and make withdrawals of specific denominations. For example, taking out £200-worth of 50p coins would give you 400 chances at finding a rare one.
Sift through these and you may just find some rare ones. The rest of the 50ps can then be returned to your bank account. Beyond collecting coins such as the 50p or £1 – looking for rare vintage coins can be a niche pursuit that involves valuations from professional coin collectors.
There’s a universe of vintage coins out there and values fluctuate wildly. Old pre-decimalisation money such as shillings and crowns likely won’t have much value, but the market extends all the way to Victorian coinage and older. That being said the likelihood of finding old Roman coins, Spanish gold doubloons or even an Anglo-Saxon hoard are vanishingly rare!
Here are a few more common coins to look out for though, which are much more likely to turn up in your change and perhaps fetch a better-than-face-value price.
To look at the rarity of coins you may find, resources such as Change Checker are a great place to start.
Beatrix Potter – The Royal Mint released a series of coins commemorating the work of Beatrix Potter in 2016. While some have very high circulation rates, other such as the third Peter Rabbit coin had very low issuance numbers and are therefore much rarer.
2012 Olympic coins – The Royal Mint produced a whole series of coins to commemorate the 2012 Olympics. There are 29 different Olympic coins with varying degrees of rarity. For example, over two million swimming 50ps were made but much rarer is the Offside rule coin or Triathlon coin which had only just over one million produced each.
A-Z 10ps – the 10p A-Z coins, launched in March 2018, all reflect one letter of the alphabet which relates to Britain. For example, a commonly found 10p is the K for King Arthur. Much rarer in this series is the Z for Zebra crossing.
Kew Gardens - perhaps one of the rarest 50p coins to enter circulation, the Kew Gardens 50p frequently sells for hundreds of pounds. Definitely one to keep an eye out for, with just 210,000 minted in 2009, it is the rarest 50p according to Change Checker.
Looking for love? Then watch out for romance scams
Romance scams have boomed over the past year as fraudsters switched their attention to those searching for companionship during lockdown.
Figures from UK Finance, the trade body, reveal a 20% increase in the number of bank transfer romance frauds in 2020. Overall, victims lost £68m – or more than £7,800 each – last year to this type of fraud, according to the trade body.
Romance fraud is a particularly vile type of scam where fraudsters will pose as a potential love interest on a dating website who is looking for a long-term relationship. Usually over many weeks or even months, the fraudster will try to gain the trust of an unsuspecting victim by trying to convince them that they want a genuine relationship. Once that trust has been built, the criminal will typically ask for cash to help pay for bogus medical bills, to fly over to be with the victim or for some other fictional emergency. However, once the victim sends the money, the fraudster typically flees and is never heard from again.
Katy Worobec, managing director of economic crime at UK Finance, says: “With the rising use of online dating services during lockdown, criminals are using clever tactics to exploit people who think they’ve met their perfect partner online. “Romance scams can leave customers out of love and out of pocket, but there are steps people can take to keep themselves or their family and friends safe – both online and offline.” Romance scams can be highly sophisticated, and therefore spotting them is not always easy.
However, below are some tips you can use to make sure you stay safe online.
- Be suspicious: If you are asked for money by someone you haven’t been speaking to for that long, or by someone you have never met, you should assume it’s a scam.
- Check their profile photo: Typically, scammers will steal the profile picture of someone else and pass it off as their own. However, you can tell if someone has done this by saving the photo and conducting a reverse image search on Google. If the name they gave you doesn’t match the one on your image search, the chances are you’re talking to a scammer.
- Ask friends and family: If you have any doubts that the person you are talking to is not real, talk to friends and family to see what they think.
- Guard your personal information: It’s not only money a fraudster may be after, so do not share personal documents such as your driver’s license or passport.
- Other tell-tale signs: Instead of asking you for money, they may instead ask you to take out a loan for them, or to transfer money to someone on their behalf. You shouldn’t do either of these things, regardless of what reason they give you.
- Tell the authorities: If you think you’re speaking to a scammer, or you think you may have been the victim of romance fraud, report it to Action Fraud on 0300 123 2040 or via actionfraud.police.uk.
Hold your network up to scrutiny on PII cover
This article first appeared in Professional Adviser.
In the current climate, PII renewal can be an anxious affair. In this blog I discuss increasing excesses, costs for network firms and if things aren't working out if it is time to reassess membership...
It is becoming apparent that to keep costs down, some networks have altered what level of cover they have, with excesses, in particular, said to be on the rise.
It was recently professional indemnity insurance (PII) renewal time for the subsidiaries within the Beaufort Group. Never the most joyous of tasks, we are grateful that our premiums were broadly flat year on year.
Crucially, we also maintained our excesses, something we know from speaking to peers is not the case for many businesses.
We are now all familiar with the issues facing the PII market at large. Following a huge contraction in the number of insurers operating within it, some firms that are already insured are struggling to change insurers, and the best an adviser business can often do is hope that its existing insurer will renew.
Five years ago, a typical excess would have been £2,500 to £5,000 per case. Now, £25,000 excesses are not uncommon, and they can be higher.
This latest round of PII renewals comes at a delicate time for the economy, and insurers are clearly concerned about the long-term impacts of Covid-19 on the UK economy.
That is their business, and they have to offer rates they believe reflect the current environment, but these higher rates have to be paid by someone, and if you are a member of a network, it is often you bearing that cost.
Digging into this, it is becoming apparent that to keep costs down, some networks have altered what level of cover they have, with excesses, in particular, said to be on the rise.
Whether or not this has been communicated fully depends on which network you belong to, if you are not directly authorised, but it is nonetheless worth enquiring as, just with any form of insurance, the additional costs individual IFA firms may need to pay could well have climbed.
What can you do about it?
If you discover that your excess has indeed gone up, or there have been any other changes to the way the network's cover impacts your business, there are a few options.
Firstly, it is important to get a clear grasp of what has changed. Be sure to speak with your network and get a clear answer about PII cover, and any other areas you are unsure of. Be clear about how your liabilities have changed.
What will the future hold? Advisers deserve to know how their chosen network's systems and controls will help their business weather any storms, so ask about what steps your network has taken to stay close to their insurer, as well as about specific policy terms and premiums.
Finally, there is always the nuclear option; leaving the network. It can feel like there is never a good time to look at exiting, and the expected hassle of doing so makes many firms shy away from it and stay put. However, if you are ultimately unhappy with how your network operates with regard to your PII liabilities, then leaving might be the only option.
If this is you, then before you start the exiting process, understand the terms under which you will be able to leave.
This starts with reading the contract (something too many advisers fail to do); look out for excessive notice periods, the retention of fees and other onerous exit terms. Sometimes what seems like a minor condition is the one that causes the most pain. Something innocuous like the necessity to check a number of files before exit can scupper any plans if it takes months to have those checks carried out.
Due diligence should be broad. Get reassurance that the network has the capacity to process any exit efficiently to avoid you being held in limbo, and be specific on times. If possible, speaking to firms who have left the network can really help to understand and prepare for the exit experience.
Whether you thrive in a network or not is largely down to two factors: whether your business ethos aligns with your network's own, and if your network put your needs first. If you have any doubts about either of these, it might be time to change.
It's no mean feat to find the right setup, and unfortunately, the reality is the wrong network can set your business back, rather than help it to grow and develop.
The insurance it offers you is but one of many factors to consider. However, it is a core one, and the only way to make sure you are getting what you need is to hold your network up to scrutiny.
Is it time you ditched your High Street bank and went digital?
With a slew of digital-only options, is it time to ditch your old bank? We look at how Monzo, Starling and Revolut are challenging the old guard.
Digital-only banks have become more established in the past few years, with a multitude of options. But is it time to ditch your High Street bank for one of them? In the past decade since the financial crisis a multitude of digital-only banks have emerged as banking customers look for new and innovative ways to handle their finances.
Digital-only financial options are now really varied, and consumer choice has never been better, with plenty to pick from via your smartphone. The range of services from digital-only providers now matches those provided by the high street. However, for the purposes of this article we’re going to focus on current accounts. Big banks such as HSBC, Lloyds and NatWest have come under increasing pressure in recent times from so-called challenger banks in the current accounts market. But what do these challengers actually offer to customers?
Here are some top picks, their best features and drawbacks.
Monzo
Perhaps the most famous one on this list, Monzo is well-known now for its flashy ‘hot coral’ (read: pink) debit cards.
Monzo offers lots of features including budgeting, spending analytics and ‘pots’ which you can create to help manage and apportion your money. You can even set up bill-specific pots to keep cash aside to pay your monthly bills from. You can set yourself monthly spending limits and make payments really easily within the app. It will also give you summaries of spending areas each month, categorised in sections such as eating out, personal care or groceries. This can be especially helpful if you’re struggling to identify areas where you might be overspending regularly.
Like High Street stalwarts such as Lloyds or NatWest, Monzo is a fully licenced UK bank. As such you get £85,000 deposit protection from the Financial Services Compensation Scheme (FSCS). The account also provides other optional services such as overdrafts and loans. It also has a premium service called Monzo Premium, which costs £15 and will give you phone insurance, worldwide travel insurance, 1.5% interest on balances up to £2,000 and other perks – it even comes with a shiny metal bank card. Check if you’re not already receiving some of these services such as phone protection on your home insurance though, as it may not be worth it.
Starling
The other major digital-only bank to choose from is Starling, founded by long-time banker Anne Boden. Boden worked for years at major High Street banking institutions before taking what she’d learned from those places and implementing the best bits into Starling.
Starling has lots of spending analytics, makes payments really easy and has a user-friendly interface for customers who might not be the most tech-savvy. It also has segregated spending pots called ‘spaces’ which can help you manage small savings goals.
One of the standout features on Starling though is zero-cost spending abroad. Starling charges nothing for you to spend abroad, and only changes your money into foreign currency at the interbank rate, meaning you’ll always get the best deal when using your Starling card abroad. It also has the option to add joint accounts for you and your partner, plus euro accounts if you need to keep, send or receive money in euros.
As with Monzo, it is also a fully licenced UK bank offering all the same protections as peers.
Best of the rest
While digital banking apps have proliferated in recent times, most are not really worth considering for one specific reason – they aren’t licenced UK banks and don’t have the same level of deposit protection as Monzo, Starling, or big High Street banks.
There are, however, two names of note in this category: Revolut and Monese.
Revolut has become something of an alternative option. It has many of the features of Monzo and Starling but doesn’t currently have FSCS protection. Rather, money is secured in so-called e-money accounts. The feature that sets Revolut apart is the greater variety of currencies you can maintain balances in. It is, however, an inferior choice if you’re looking for UK-specific current accounts.
Monese gets a mention because it is extremely easy to set up and use. However, like Revolut it doesn’t currently carry any deposit protection.
Whether you decide to drop your old bank or not, there is certainly plenty to choose from now in digital banking. Although the aforementioned apps have done a lot to innovate when it comes to mobile-only banking, many of the bigger banks have now largely caught up in terms of features.
It’s best to consider what you need the account for, and whether it’s suited to you, before moving all your bills and salary into it. Remember though that there’s no limit to how many current accounts you have, so keeping more than one is perfectly possible. Just try not to open them all at once as this may leave an impression on your credit report.
Tips for building a nest egg for your children or grandchildren
Starting early can make an extraordinary difference to long-term wealth. Here are some options to help your children or grandchildren.
Building a nest egg for a child or grandchild needn’t be a difficult process. But the earlier you start, the better the outcome will be for them. Not starting saving earlier in life is a common problem, but it can be difficult in your 20s and 30s to get your savings going with so many costs of living. But once you’re older, with kids or even grandkids, you may start to think about whether you can help them get a financial foothold in life to help them when they’re older. Not only does it make sense from an inheritance perspective – the more you give away while you are younger, the less potential there is for tax liabilities – but the earlier you start building them a nest egg then the bigger that egg will be.
If you’re looking to make a start there are some options which can make It simple and tax-efficient.
Junior ISAs
The Junior ISA or ‘JISA’ should be your first port of call when considering saving for a child or grandchild.
JISAs, like normal ISAs, come in a few forms. You can start with a Stocks and Shares JISA or a cash JISA. Cash JISAs, while offering rates that tend to be better than normal savings accounts, still don’t offer much by way of interest at present. At the time of writing the top cash JISA offers 2.5% interest.
A stocks and shares JISA, while not offering a guaranteed rate of return, will have the benefit of access to investment markets. Because the time horizon of a child is so long (if you start saving for your kids when you have them you potentially have an 18-year window to amass a pot for them), it suits investing in equity markets which have shown to deliver superior long-term returns.
The Government has increased the limit on annual JISA contributions to £9,000 a year. This can be split between a cash account and an investment one, if you prefer. The child can then access the money in the JISA and have full control of it at age 18.
Children’s savings accounts
There are a variety of children’s savings accounts on offer, some from big High Street banks and some from new challenger banks. While the top-choice products offer similar rates to cash JISAs, they are mainly inferior to JISAs because of their lack of a tax wrapper. In reality then these kinds of accounts should only be turned to if you’ve maxed out the annual contribution for your child’s JISA, but still have further money you want to give them.
There is one consideration to make for children’s savings accounts however, from the perspective of education. Often a children’s savings account will give more responsibility to them than a JISA which parents manage. Giving a child their own account to manage can provide valuable life lessons to them from an early age.
Pensions
Yes, that’s right, a pension. You can open a pension for your child. While the rules governing pensions prevent them from accessing the money before pension freedom age, it could be a valuable alternative or addition to a JISA.
The annual limit you can contribute to a child’s pension is £2,880 per year. This is given 20% tax relief much the same as regular pensions, meaning you can put away up to £3,600 in total. Like a stocks and shares JISA, a pension has the benefit of access to investment markets, which really could help with long-term wealth creation.
The conundrum of picking between a pension or a JISA is that the former can only be accessed at age 55 (which could increase to 57 in 2028), while the latter gives the child full access to the money at age 18.
Unless you’re confident that the child will have a fully responsible mindset with their money at age 18, it may be worth hedging and having a blend of both accounts.
But likewise helping them to understand the importance of what you’ve given them and learning good financial habits as they grow up may put them in a great position to use that money wisely. And with the long-term landscape so uncertain, it may be better to give them something they can access at 18.
Are you saving enough for retirement? Here’s what to consider when planning
From living longer to cruises of a lifetime - here are a few things you need to consider when saving for your retirement.
There’s no one easy way to calculate how much you’ll need to get by in retirement, as everyone has different goals and aims for how they want to enjoy it. However, there are some general pointers that can help you get a grasp of what you need, and what you need to be saving and investing to achieve it. When planning for your retirement, thinking about how much income you’d like on a monthly basis is a great starting point.
A rough guide to help could be assessing what you spend monthly now, and then taking away bills which will not be there in future (your mortgage, for example, which has a fixed end date). Doing this can help you get a clearer picture of what it costs just to maintain the lifestyle you currently have.
A common ‘rule of thumb’ in this regard is replacing about 70% of your salary on an annual basis. This is predicated on the idea that you will have paid off the mortgage, so won’t have that to pay off each month. Think then in terms of percentage income. A £200,000 pension pot that pays 3% per year will pay out £6,000. You might be able to attain more income for that size of pot, but it will involve more risk.
It’s also important to think about whether you want work to be a hard stop, or you plan on transitioning over time out of full employment. This can be a good option if your pension pot doesn’t extend as far as you may like yet, and the state pension is a way off from kicking in.
Keeping the state pension in mind is also important. While it may not seem like enormous sums of money, it does form a key part of many people’s retirement plans. The age of the state pension is creeping up slowly, which needs to be kept in mind when planning.
Perhaps the best answer to “how much should I save?’ is “as much as you can”, but there are some other factors to consider.
Think of the ‘U’
Saving for retirement is about goals. What do you want, and how long do you expect to want it for? As retirement unfolds everyone has a different idea of what they’ll want to do with that time and money.
On average though people’s expenditure tends to follow a ‘U’ shape. That is – when they first retire spending is high because they reap the benefits with tax-free lump sums and access to cash - taking nice holidays or maybe finally putting that extension they always wanted on the house. As they settle into a more normal routine over time though, costs start to diminish (the bottom of the U).
Finally, as people enter their later years, costs tend to rise again. This can be from more banal things like getting help in the garden or around the house, to more significant events such as health issues or care requirements.
Lamborghini or Laburnum?
Thinking about your needs in retirement can be framed principally through the kind of lifestyle you intend to lead. The income needs of someone who plans to be at home with grandkids tending to a garden will be very different from someone who intends to jump on cruises and see the world, or buy a fast car. Both choices are fine ones to make, but the former will likely be more frugal than the latter. That being said, if you’re planning to spend time at home, you will likely have to think more about the cost of living there, maintenance and even whether you’ve got equity locked up inside the property.
Live long and prosper
The other big thing to think about is longevity. Not only do you need to be able to replicate a portion of your income via a pension and other wealth on day one of retirement – it needs to be able to last for a long time. While predicting your own lifespan is impossible, there is a guide to keep in mind from the Office of National Statistics (ONS). At the moment a man aged 55 has a life expectancy in the UK of 84 years according to the ONS. This rises to 87 for a woman. While these are only averages, this is a significant period of time by any measure. While taking an income from wealth is perfectly possible, the more you save early on, the more time it has to grow and the better your outcomes will be overall.
For those that don’t have as much saved at retirement as they would have liked, it means either adjusting their lifestyle accordingly, or taking more risk with their pensions (something which brings its own challenges). The good news is, a lot of this can be addressed right now. Saving regularly and investing that money to an appropriate level of risk for you, at all stages of your adult life, is crucial. Retirement planning needs to be done as soon as reasonably practicable, because the earlier you start investing in a pension, the more it will be worth.
Your adviser can help you consider these plans more carefully. Don’t hesitate to get in touch.
Savings lotteries – what are they, and are they worth it?
Savings lotteries have become more prevalent in recent times as banks look to incentivise saving without offering better rates. But are they any good?
Nationwide Building Society has launched a new lottery for customers, which automatically enrols them in a monthly prize draw where one lucky winner can scoop £100,000. How does it compare to others?
Nationwide had previously launched different lotteries for different kinds of accounts, including for its Cash Isa and Start to Save products. But this is different in that any Nationwide customer with a mortgage, current account or savings account will be automatically entered. There are 8,008 chances to win each month, with a top prize of £100,000, two £25,000 prizes, five £5,000 prizes and 8,000 £100s up for grabs. The competitions will run monthly for 12 months from September and be selected from a pool of roughly 14 million Nationwide customers.
Alternatives
Nationwide isn’t the only firm to offer savings lotteries to customers. Indeed, with the crashing of savings rates in recent years, it has become a more common incentive to entice new customers without offering better rates.
Perhaps the most ubiquitous of the lot are Premium Bonds. The National Savings & Investments (NS&I) Premium Bonds prize draw is incredibly popular. Some 21 million savers have over £107 billion squirreled away in Premium Bonds according to MoneySavingExpert. Rates were slashed recently though, so the odds of winning anything at all have lengthened considerably. Premium Bonds do still offer good prizes, including two £1 million prizes every month. NS&I says the rate at which you’ll win prizes each year roughly equates to a 1% rate of interest on your savings. This is not however guaranteed, and you could hold the bonds your whole life and win nothing.
The other major savings lottery available at the moment comes from Halifax Bank. It is offering three prizes of £100,000 every month, plus more smaller amounts. To qualify you’ll need to open a savings account with the bank and deposit at least £5,000.
Other banks have recently offered new ‘lottery-style’ accounts, including NatWest, Post Office Money and Family Building Society, but those are currently unavailable to new customers as they have proven so popular.
Overall, the aforementioned lottery accounts can be a good idea if you have smaller sums of cash, as rates on best buy accounts are shockingly low anyway. That being said, the bulk of your savings may be better off elsewhere, such as in investment markets, in order to generate a better rate of return.
If you’d like to discuss options for your cash savings further, don’t hesitate to get in touch with your adviser.
Navigating ESG investing in an increasingly complex world
This article first appeared in Professional Adviser.
While ESG investing seems like a straightforward concept, factors such as geopolitics cannot be ignored. But investing in 'unethical' countries can produce long-term positive change.
Not too long ago, ‘ESG' was just another investing buzzword, but the explosion of interest in sustainable investing strategies now cannot - nor should not - be ignored.
On the face of it, this method of investing seems like an obvious choice, allowing clients to grow their wealth while making the world a better place. But, as we all know, if something seems too good to be true, it probably is.
While ESG investing certainly has its benefits, it is not as straightforward as clients may think.
Balancing returns and volatility
Issues of sustainability have been prominent in headlines for several years, but the coronavirus pandemic was the first real acid test of ESG investing and, on the whole, it seems to have performed fairly well.
This is partly because a focus on sustainability makes stocks with a high ESG rating tend to be less prone to volatility. This meant that they struggled less when markets fell in 2020 due to the economic effects of the initial lockdown.
However, it's important to scrutinise the Panglossian belief that "more virtue equals more money" as this isn't always the case. While ESG stocks may have fallen less in the initial shock, they also rose less as markets recovered.
Avoiding ESG can have benefits
When clients are investing their wealth, they are almost certainly looking to grow it - and if growth is the absolute priority, ESG can pose a dilemma.
When clients consider ESG, it is typically expressed through a simple hypothetical like this: "You can choose to invest in a company which offers strong returns, but the company principally manufactures guns and rockets. Is the indirect impact of this company worth the financial gain you would make?"
Clients may find that easy to answer but the real world rarely reflects these simple hypotheticals. When you start to consider geopolitics, too, things are no longer so black and white.
An excellent example of this geopolitical dilemma is investing in China.
If clients had bought the iShares MSCI China ETF (MCHI) ten years ago, they would have doubled their money by now. The country's transition in recent decades to a more free-market style economy has clearly resulted in strong growth.
However, investing in Chinese stocks has significant ethical implications - not least because of China's very poor record on human rights. A cursory glance at recent headlines will quickly confirm this, with the genocide of ethnic minorities in Xinjiang and the arrest of pro-democracy activists, such as Jimmy Lai, in Hong Kong.
If you were investing according to strict ESG principles, you would surely have to avoid China - except the situation becomes even more complicated when you consider the bigger geopolitical picture.
Unethical investing for long-term change
China has come a long way in the last few decades, embracing capitalism and quickly becoming one of the best-performing emerging economies, which has drastically improved the standard of living.
According to the World Bank, there were about 750 million people living in poverty in China in 1990. But thanks to the growth of international trade, that number had fallen to just 7.2 million by 2016, improving the lives of ordinary people in real and tangible terms.
It's an achievement that would have been delayed or prevented if the Western world - whilst taking a principled stand on China's crimes - had also turned its back economically.
The same can be said when you consider certain African nations such as Mali, where the UK is a key source of foreign investment.
Like many post-colonial states, Mali has a poor record on human rights. State security forces have been widely accused of excessive violence against dissidents and the country still retains the death penalty despite international pressure.
However, poverty has been falling since 2015, partly due to an increase in international trade, with foreign investment enabling farmers to modernise agriculture.
Once again, there is a very real risk that removing this investment would hamper that progress, and undermining Mali's economic growth could also derail its transition towards democracy.
It could therefore be argued that the interests of the investor and of the Malian people are now aligned. The investor receives strong returns on their investment, while the influx of foreign capital helps to combat poverty and improve people's lives.
Think carefully
In this way, the dilemma over ESG investing is much more complicated than a simple question of ‘right' versus ‘wrong': that's a false dichotomy.
Aligning a client's investments with their principles can be very rewarding. But it's often important to test those principles in order to avoid missed opportunities.
Inflation is back – should you be worried?
Inflation has been off the agenda for investors for years, but prices are rising again – and it could have implications for your finances.
Inflation has been low by historical standards for much of the past decade, with price growth falling particularly sharply over the past three years. Never the easiest factor to track when it comes to your finances – a situation not helped by the amount of measures for inflation which exist – inflation has nonetheless been muted for the past few years. Using the Government’s preferred method of calculating inflation – known as CPIH – we can see that inflation has been below its official target of 2% since July 2019.
What is CPIH
CPIH stands for The Consumer Prices Index including Owner Occupiers’ Housing and covers the cost of a list of everyday items consumers buy or use, including housing costs. Between July 2019, when it stood at 2%, CPIH has plunged as low as 0.5% in the depths of the pandemic last August, before recovering as the economy unlocked. It currently stands at 1% as of March, with the reading for April due out later this month. Clearly this is some way off the Bank of England’s own target of 2%, but the important thing to remember with inflation is the trajectory, not the absolute number. This was alluded to at the latest Bank of England meeting when Andrew Bailey, the governor of the Bank and head of the committee which monitors inflation, said inflation could be “a bit bumpy this year.” Indeed, the central projection from the Bank is that, as the vaccine programme continues and the economy unlocks more, it should mean the CPIH figure jumps above 2% towards the end of this year. There is also the ever-present risk that it goes higher than forecast, with factors such as rising commodity prices and demand for goods and services also having the potential to exceed forecasts and push up the overall inflation number.
Should you worry about rising inflation?
Inflation is bad for some of your investments, in particular cash. The value of cash is eroded over time by inflation, so a pound today buys you substantially less than it did 20 years ago, for example. For investors sitting on large amounts of cash, rising inflation is problematic at this point in time because interest rates – and therefore the interest the bank pays you for leaving your money in cash – are at record lows. The Bank of England was forced to cut rates to 0.1% in the UK last year in response to the pandemic, and it has yet to raise them from this level. With inflation currently at 1%, it means the value of any cash you may have in the bank is being eroded every year, unless it is in a bank account paying more than 1%. For investments too, rising inflation has implications. Some investments, like commodities such as oil, can protect portfolios from rising inflation, as they often rise in tandem. Investments such as bonds, on the other hand, suffer because they pay holders a fixed amount of interest every year, and if inflation rises it can often leave these bonds paying an income that is below the inflation rate.
What can you do about it?
As with all investments, including cash, investors should regularly review their holdings. If inflation is rising, there are a number of options to counter its damaging effects on your wealth, including investing in equities, commodities, and some inflation-linked investments which track the inflation rate.
However, as always, if you have any concerns or queries the best course of action is to get in touch with your adviser.
A quarter of a million over 55s get caught out by this pension tax trap each year – don’t be one of them
The little-known Money Purchase Annual Allowance is catching out thousands of pension savers each year. Here are a few ways to prevent yourself from falling into the trap.
A little-known pensions rule catches out thousands of savers every year, and has potentially become more prevalent because of the pandemic, according to new data. Some 5,000 over 55s are stung every week by a little-known pensions rule called the Money Purchase Annual Allowance (MPAA), data from retirement firm Just Group has shown. The Money Purchase Annual Allowance (MPAA) is a specific rule which can be accidentally triggered by savers, cutting the amount they can save in to pensions tax-free under their annual allowance. The figures from Just Group suggest some 260,000 people are being caught out by the rule every year.
What is the Money Purchase Annual Allowance?
The Money Purchase Annual Allowance (MPAA) is a rule which defines how much you can deposit into a pension each year and still receive tax relief on those contributions. The normal limit is £40,000 and is defined by the amount you contribute into a Defined Contribution (DC) pension, including employer contributions. With Defined Benefit (DB) pensions – also known as final salary pensions – this is defined as the amount by which it increases in value each year. However, the MPAA - which is triggered by a particular set of circumstances - can cut an individual’s annual allowance from £40,000 to £4,000.
Those triggers include:
- Taking an entire pension pot as a lump sum or starting to take ad-hoc lump sums from a pension pot
- Putting pension pot money into a flexi-access drawdown scheme and taking an income
- Buying an investment-linked or flexible annuity where income could drop
- Having a pre-April 2015 capped drawdown plan and taking payments that exceed the cap
The rule is in place so that no one can benefit from having a pension income while still feeding new cash into a pension pot and taking the benefit of tax relief. While the rule is a feature of the system rather than a failure, the contention is that some over 55s who may not have otherwise triggered the MPAA during normal times, have been inadvertently hit by it during the coronavirus crisis. For instance – someone aged 55 may have been in full-time employment and still contributing to their pension regularly, with no intention of drawing money out of the pension because they still had a salary. Thanks to the economic crisis caused by the pandemic, they may have since needed to access extra cash as an emergency, or even lost their employment, and with it, regular pension contributions. Even if the MPAA is triggered under these circumstances the person is treated as if they’re now living on their pension income. They are then unable to return to making regular contributions up to £40,000, even if they don’t intend on using their pension for an income and still want to put more in.
What is the best way to avoid MPAA?
The good news is, there are some steps you can take to avoid being penalised inadvertently.
- Have a rainy day fund. Many people have been forced to trigger the allowance because they’ve needed short-term cash during a crisis. Having a solid rainy-day fund in cash savings would prevent this.
- Don’t take more than the 25% tax-free lump sum from your pension. You can take up to 25% from your pension tax-free, so if you don’t go over this, it won’t trigger the MPAA
- Take from smaller pension pots first. Any pension pot you have under £10,000 will be exempt from MPAA if you make a withdrawal. However, you can only do this in a maximum of three non-occupational pots.
Once you retire and begin to rely more on your pension the MPAA may become unavoidable. But if you’re no longer earning a salary or contributing new cash routinely to a pot, this shouldn’t be a huge issue. The trick is to be careful around the time when you are looking to use some pension funds if you are still earning from a salary and trying to save and benefit from tax relief.
If you’re interested in discussing the MPAA more, or want to know anything else about your pension, don’t hesitate to get in touch with your adviser.