Retirement planning: the key to being well-prepared for your golden years
Planning for your own retirement is a tricky topic. There are many variables to consider, and each individual has a specific set of circumstances and goals to achieve.
But there are a few key areas of planning for your golden years that can help you to have clear in your mind what needs to be done, and how you can aim to achieve your ambitions.
Here are four key areas to consider.
- Time horizon
Thinking about when you would like to retire is perhaps the most fundamental consideration when planning for retirement. Essentially, every decision you make depends on when you actually plan to stop working.
There are a lot of variables to it as well. Retirement is not the straightforward end day and handshake it once was. Evermore frequently people decide to go on what is called a ‘glide path’ to retirement, reducing hours or days in the office until eventually stopping completely.
You’ll need to consider your age now, and how old you’ll want to be when you retire. The younger you are and the further away your retirement date, the more time you’ll have to save and invest to grow that wealth.
If you’re happy working until an older age other considerations such as State Pension entitlement become relevant, as you’ll likely have access to it from age 67 (or later depending on your current age).
- Risk appetite
Once you have set your goals for retirement age – or glidepath to retirement – you’ll want to consider how you’ll get there. There’s a good chance you’re already building wealth through a variety of resources such as property, pensions and ISAs.
Depending on your time horizon you will need to accept certain levels of risk within your portfolio in order to reach those goals.
While being able to save set amounts is key, the compounding effect of growth and regular contributions will have the biggest impact on how your retirement funds grow. Ultimately it is ok to be more conservative with your tolerance for risk, but that may have an impact on the point at which your wealth reaches a size at which you feel comfortable enough to retire.
- Spending needs
You also need to estimate how much you’re likely to spend in retirement. Again this is very subjective, as each individual has a different idea of what their golden years will look like. For some it looks like world cruises, nice cars or even moving to somewhere sunnier. For others it is staying at home, helping with the grandkids and pottering in the garden.
Either choice – or anything in between – is totally fine. But both carry very different kinds of cost implications.
On top of that, age and longevity is something important to consider. Although not a hard and fast rule, retirement spending is often ‘U’ shaped, if plotted on a graph. At the beginning of retirement people tend to enjoy some of the good things, going on trips or spending some pension cash on home improvements.
Then as time goes on many settle into a rhythm that is generally lower cost (the bottom of the U). Finally, as people enter advanced ages costs such as help around the home (gardeners, cleaners etc) and even care costs, start to mount up.
All this is to say it is hard to establish what an ‘average’ income should look like for any individual. With these different costs in mind it is important then to think realistically about what you’ll need, and how long you’ll be able to sustain it for.
Our financial advisers can help you create a financial life plan ’, which can be a great way to properly visualise how this might work.
- Estate and tax planning
Finally, a really important consideration is how all of this is structured. As mentioned before we’re given access to a variety of wealth building tools such as pensions, ISAs or property.
In the first instance it is essential to plan how much of your money goes where to make it as tax efficient as possible. Then you’ll need to think about the tax implications of this wealth once you’re gone – and how to make that process as tax efficient and simple for your loved ones as possible.
With the inherent complexity of these issues though, it pays to have the help of a qualified financial adviser to plan for the best outcomes possible.
Treasury drops Capital Gains Tax and Inheritance Tax reform plans – here’s what you need to know
The government has ditched plans to reform and possibly hike Capital Gains Tax (CGT) and Inheritance Tax (IHT), in a move that would have likely hit wealthier households.
In its update on the function of the Office of Tax Simplification (OTS), published at the end of November, the Treasury appears to have quietly scrapped mooted changes to both CGT and IHT.
The OTS initially proposed changes to IHT that would have seen the tax radically simplified. Currently, the system for taxing inheritance relies on a series of exceptions, allowances and other rules that make it difficult for families to negotiate.
It has also been criticised for the increasing number of families liable to the duty every year since its creation. Of CGT, the OTS suggested aligning the allowances with income tax, making it less attractive a way for many to take earnings.
Current rates of 10% for basic rate and 20% for higher and additional rates would have been moved to align with 20%, 40% and 45% rates of income tax respectively. The first £12,300 of capital gains earnings each year is currently tax-free.
Instead, the government accepted some minor changes to CGT rules, including the amount of time divorcing couples are allowed to transfer assets between each other before becoming liable for CGT.
Married couples and civil partners are able to transfer assets between each other without incurring any CGT liability. But for divorced couples this perk expires at the end of the tax year in which they divorce. This time limit is set to be extended.
What now for CGT and IHT?
The decision by the Treasury suggests the reform of CGT and IHT is dead in the water – for now at least. But that is not to say that the taxes might not come in line for reform in the future.
In the Treasury’s response to the OTS, financial secretary to the Treasury Lucy Frazer wrote: “These reforms would involve a number of wider policy trade-offs and so careful thought must be given to the impact that they would have on taxpayers, as well as any additional administrative burden on HMRC.
“The government will continue to keep the tax system under constant review to ensure it is simple and efficient. Your report is a valuable contribution to that process.”
Indeed, according to an article in The Times newspaper, Rishi Sunak is planning to make sweeping changes to taxes ahead of the next General Election.
According to the report, part of his plans include increasing the threshold for IHT. This would have the impact of making many less families liable to the tax and would likely be a popular measure among Conservative voters.
The new social care cap: how does it work, and how much will I pay?
After years not addressing the issue, the government has finally moved to implement new rules for the funding of social care.
While the government faced a significant rebellion from its own MPs, the measures passed Parliament on 23 November, making them all but inevitable. The new rules will see a cap of £86,000 for anyone in England to pay for care in their lifetime. This means that no one will ever have to pay more than £86,000 towards the cost of their own care.
The upper capital limit – which determines eligibility for care support – will also rise. It is currently set at £23,250 but will increase to £100,000 under the government’s plans. This means anyone with personal wealth and assets worth less than £100,000 will be eligible to receive additional financial support and will never pay more than 20% of these assets per year.
Anyone who has more than £100,000 in assets will receive no financial support from their local council.
The lower capital limit – which is the threshold below which people will not have to pay anything – will increase from £14,250 to £20,000. However, if someone is earning an income of some sort, such as from a pension or other investments, they may have to draw upon this to pay some costs.
The new rules will be enforced from October 2023, so for now the existing system remains in place and any contributions made before then won’t count towards the cap. In terms of what is covered under ‘care costs’ – it is anything relating to the everyday needs of someone who is unable to perform basic tasks for themselves, such as cooking, washing and dressing. It does not include day to day living costs such as buying food or bills. In the case that someone is no longer able to live independently and has to move to a care home, this would be covered by the new caps and allowances.
There are some further complexities to the new rules too. Only savings and income contributions towards care costs count towards the £86,000 cap. Any contributions from the local council or other financial assistance won’t.
The plans also don’t protect people from having to sell their house to pay for care. However, anyone who faces this situation can apply to delay the sale of their home until their death – when the bill for the care would come due and leave family members to settle the estate.
Rishi Sunak’s Autumn Budget: what it means for your money
The Chancellor, Rishi Sunak, has delivered the government’s Autumn Budget.
The measures contained within it set the tone of the UK’s finances for the next 12 months. And while there are some fresh measures in there, it is the distinct lack of action on many issues that may have the biggest effect on household finances.
Here are some of the big changes, and several things that weren’t touched, but will affect your finances.
National Insurance and dividend tax hike
Not announced in the Budget per se, but perhaps the biggest shift in government taxation in many years, National Insurance and dividend taxes face a 1.25% hike to help pay for health and social care.
The hike will add £130 a year to someone on an income of £20,000, while those on a higher income of £50,000 will see an extra £505 come out in taxes.
With the dividend tax hike there’s no tax to pay on the first £2,000 of earnings, but beyond that you’ll pay an extra 1.25% on top of the current rates. That means 8.75% for basic rate payers, 33.75% for higher rate payers and 39.35% for additional rate payers.
There were a raft of other personal finance-related measures including:
- A hike in the living wage to £9.50 per hour
- A cut to the Universal Credit taper rate to 55%
- An alcohol duty reform to simplify the way beer, wine and other drinks are taxed
- Fuel duty being frozen for a 12th year
But perhaps more noticeable was the absence of certain provisions.
What was missing from the Budget?
Sunak avoided making certain changes that are in and of themselves a form of taxation. There was also a distinct lack of help in regard to economic issues that are plaguing households at the moment.
Perhaps the biggest aspect of the tax system that Sunak left untouched was allowances. This has the effect of creating a form of stealth tax. But how does that work?
By leaving an allowance for say, Income Tax, at the same level for multiple years isn’t an out and out tax rise. But as the general earnings of the working population increase over time – be that from becoming more productive or purely to keep pace with inflation – it means progressively more and more people fall into the higher bands for tax purposes.
Take the example of Inheritance Tax (IHT). The banding of IHT has remained static at £325,000 for years. The Office for Budget Responsibility (OBR) predicts 6.5% of estates will be liable to pay the duty by 2026 – up from 3.7% in 2020. By simply ‘doing nothing’ the government is increasing its tax take over time.
The same is true for a raft of other allowances which remain static – from pensions annual allowances to ISA limits, capital gains tax and others. The more they stay the same, the more the government rakes in.
This is all more pressing than ever in the current economic climate, which is accelerating the issue, namely inflation. In order to keep up with inflation, households are having to seek higher earnings or cut their costs. Sunak did nothing to assuage inflation fears, despite hints he might cut the VAT rate on energy bills.
Overall, the impact of squeezing allowances and rising inflation could leave household incomes stretched for the foreseeable future.
NS&I Green Bonds – what are they, and is there a better alternative?
National Savings & Investments (NS&I), the government-backed savings provider, has launched its first ever green bonds.
So, what is the deal with these brand-new ethical savings accounts?
Anyone saving via the bond will receive 0.65% AER, fixed for three years. You can save a maximum of £100,000 but start with as little as £100 if you like. The money is locked away for a three-year minimum. Because it is a bond rather than an ISA, interest on the savings is taxable when the bond matures.
What’s green about them?
The bonds are the first directly offered to the public with a ‘green’ focus. The government, with climate change high on the agenda, has begun issuing green gilts to institutional investors, but saw the opportunity for private citizens to get involved as well.
The money raised for the green bonds will go directly towards investments in government green projects and initiatives. Any money the bonds raise will be matched by HM Treasury too.
At the time of writing, there is no further detail on exactly what projects this includes. But the government says it intends to update on this in due course.
How it compares
Savings rates are poor across the board at the moment. But even by these standards, ethical considerations aside, the NS&I green bond is an awful offer.
For a three-year bond the current top offer comes from JN Bank, which offers 1.81% interest over three years. This is followed by Zenith Bank at 1.78% and United Trust Bank at 1.75%.
Ultimately, then, the only reason why you should consider investing in the green bonds is if you are highly motivated to lend your money to the government to aid green projects.
What you should do instead
In reality, even the aforementioned savings rates are poor. The Bank of England recently warned that inflation is headed to 5% by the Spring, which means that any money growing by these rates is still losing value in real terms.
Instead, money that isn’t needed in the near future should be fully invested in markets. While the returns aren’t guaranteed, generally speaking, it is a better long-term approach to wealth growth.
Ethical considerations in investing are an increasingly popular and sought-after approach. Please do get in touch with your adviser if you’d like to learn more.
Rishi’s rising tax burden makes good wealth management a top priority
With the new Budget delivered by Chancellor Rishi Sunak, the tax burden on ordinary citizens of the UK is now at its highest level in 70 years.
From frozen personal allowances to National Insurance and dividend hikes, at no other time since the 1950s have we paid so much of our livelihoods to the state.
The ethical, political, and moral arguments around this are for a different blog, but there is an important overarching theme to respond to such changes – how to make the most of what we’re left with after the state has taken its levies.
Good wealth management has always been about making the most of your money in any given situation. If that situation changes, so too it is an adviser’s job to help you adapt to those shifts.
Just because the burden is now higher on paper doesn’t mean you can’t continue to benefit from good planning for your wealth.
Tax planning
A critical aspect of this comes down to good tax planning. Tax planning is a catchall term that describes several activities.
First and foremost is ensuring all your personal allowances are properly used. This includes everything from ISA limits to pension contributions and dividend allowances. Maximising your allowances is extremely important. The ISA limit is relatively generous and everything inside this is extremely favourably treated in tax terms.
Likewise, your pension has major contribution benefits in the form of tax relief. The issue for pensions is that tax treatment can become complicated when drawing down from your pot, making advice and rigorous planning essential.
There are longer-term considerations too, such as inheritance tax (IHT) planning. IHT is a booming tax that ensnares more and more households every year. While ultimately not ‘avoidable’, there are a series of allowances such as gifting and seven-year limits that let you give away wealth tax free.
Where planning comes in is through careful forecasting and management of your income and outgoings. Careful projection of how much you’ll need at any given age will be key in ascertaining how much you can give away early.
Investment
The other key aspect of good wealth management, which ultimately feeds from the above tax planning considerations, is how to grow your wealth once it is correctly sheltered.
Inflation, transitory or not, is running away at the moment. And while it may return to more typical levels later in 2022, the long-term 20-year average is still around 2.8% according to the Bank of England.
What that means is that your money has to work harder to grow in value or return an income that stays ahead of rising prices. This is a key area where good wealth management comes in to protect and grow your money via the stock market, bonds, and other financial assets.
The truth is, doing nothing is a disastrous alternative. Be it through taxes or inflation (often called a tax on saving), the forces looking to erode your wealth are too strong to ignore.
Rising bills: here’s what to look out for to keep you on financial track this winter
With the economy roaring back to life as we emerge from the pandemic, household costs are rising fast to meet rising demand for certain goods and services.
Building wealth, while a long-term priority, can be hampered if a family’s budgeting gets off track. With inflation rising - 2.9% according to the most recent Office for National Statistics data – and expected to peak above 4%, now is the time to take stock of your finances and look again at where you can save money.
Inflation isn’t the only current worry. The tax burden, as set out by the Chancellor recently, is set to rise to a 70 year high.
So, what can you do to rein in spending, or cut costs where possible? Here are a few ideas.
Energy bills crisis
The hike in energy bills has perhaps been the highest profile issue for households in recent weeks. Rocketing gas prices has led to the collapse of a slew of energy providers, while surviving firms have pulled any cheap deals available.
The days of energy switching to get a better tariff, are for now at least, over. This makes heating and electricity one of the standout cost rises households now face.
While households are protected by the energy bills cap, currently £1,277 per year, that could also be set to rise to over £1,500 in the Spring. It is essential then instead to look at how to cut the actual costs of those bills.
Basic measures should be taken to ensure your house is as energy efficient as possible. Draft excluders, radiator foils and even just turning the thermostat down a few degrees and wearing woolly socks can make a big difference.
Of course, if you’re older or not in perfect health, it’s not advisable to leave your house cold. If you’re in this position, making sure you have access to the Winter Fuel Payment could be a big help.
Cut unnecessary costs
Now is the time to look at your spending habits and decide if anything can be cut out. Gym memberships you don’t use, streaming services you never watch, delivery subscriptions you don’t maximise, should all go.
While taken individually these costs may seem minor, collectively and annually they can add up to thousands of pounds.
Another area where costs are rising are weekly food shops and dining out. Lowering costs in this area can be challenging, but it’s important to be vigilant with changing costs. Food prices can swerve up and down one week to the next, so having a spending limit and trying to stick within it is key.
Make your savings work harder
The more long-term aspect of the issue of rising costs is ultimately how to maintain wealth growth while keeping your saving levels up. Working hard to keep your costs under control is the starting point for being able to maintain good habits with regards to savings and investing.
Over and above that, ensuring strong wealth growth is essential too. Inflation is eating away at more of our savings’ value, so keeping money in low interest savings accounts is essential. Thankfully with good wealth management in place, this is eminently achievable.