Women must save £185,000 more during their careers to match men’s retirement income
Women have to save up to £185,000 more than men during their careers to match what men will earn in retirement, according to research from Scottish Widows.
The £185,000 figure can be broken down into £100,000 extra to bridge the savings gap, £50,000 to cover women’s’ longer life expectancy and £35,000 to pay for the extra care needs that this entails.
Scottish Widows has published its annual Women and Retirement report since 2006, looking at the differences between the sexes when it comes to retirement outcomes. In its latest report it has found women in their 20s today will save around £250,000 on average by the time they retire, while men will typically save £350,000.
Life expectancy for men and women also differs. A man aged 25 today is expected to live to age 86 on average, while a woman can expect to live to 89. It would take a £400,000 pot for the woman to match retirement incomes thanks to this longer life expectancy.
What is causing the discrepancy?
Looking at why there is a gender gap when it comes to retirement outcomes is not down to one simple thing.
Women can expect to earn around 40% less than men during their working years according to recent research from the Institute for Fiscal Studies (IFS). While this gap has decreased by around 25% in the past 25 years, it is difficult to close as typically, women fall behind in income terms when they take time out of the workforce to have children. The majority of gains according to the IFS are down to improvement in education among women in the past quarter decade.
As a result of these lower income expectations, savings and retirement outcomes are also negatively affected, causing the aforementioned savings gap. This is compounded by the fact that women tend to live longer too.
What can be done about it?
It is a difficult issue to resolve, especially as the only way to really avoid the shortfall is to not take time out from work. And with societal changes that reflect the discrepancy unlikely to be forthcoming any time soon, women need to take matters into their own hands.
In the situation where female workers are taking maternity leave or even breaks from careers, they should consider trying to contribute to a pension while off work or get a partner to contribute on their behalf. Anyone not working can still put in up to £2,880 each year. If someone is on paid maternity leave, ensuring they continue to pay in to a workplace pension is essential too.
Other potential measures to consider include increasing workplace pension contributions, deferring State Pension payments as long as possible and getting started with saving at as early an age as feasible.
Other than that, the best solution for women’s wealth is to have it working as hard as possible. This means making sure wealth is kept in a savings vehicle which will enable it to grow over time and ensuring any investment portfolios are structured for the best long-term outcomes.
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.
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 World In A Week - Data, data everywhere, but what should we think?
Written by Shane Balkham.
“A turn in sentiment has seen whip-sawing changes in markets and is creating a volatile environment for the end of the year.”
The Rime of the Ancient Mariner seems rather apt at this particular juncture. While the albatross heralded stormy conditions to sailors, data is signalling similar volatile conditions for the coming weeks.
The US employment for November showed that 210,000 jobs were added last month, significantly fewer than the expected 550,000. However, overall unemployment fell to its lowest level since the pandemic began. This was greeted with a sharp drop in US equities, as investors retreated from large technology companies, as evidenced by the fall in the Nasdaq index.
Employment data is a key indicator for the Federal Reserve, so when Chair Jerome Powell gave testimony to Congress last week, in which he signalled his support for an acceleration in the wind-down of their quantitative easing programme, markets concluded that coupled with the jobs data, faster policy tightening was assured. The narrative should be about an economy getting stronger where extreme emergency policy is no longer needed or appropriate. This suggests an environment where we can expect interest rates to rise and tapering to be complete sooner rather than later.
We have the meetings of both the Federal Reserve and the Bank of England next week, where expectations are high for the rhetoric to confirm this story. The Federal Reserve will also publish their updated ‘dot plots’ giving us an indication of where they expect short-term interest rates to be over the coming months.
Before the meeting of minds across both sides of the Atlantic, we have the US inflation reading on Friday where the top end of forecasts has a reading in excess of 7%. This should provide weight to the Federal’s decision, especially now the word ‘transitory’ has been retired from their lexicon. The twist in the tale though is we have the new variant of COVID-19 to concern us. Data surrounding Omicron’s virility and potency has yet to be confirmed, although the latest news suggests that this variant could be milder than Delta.
The move towards normalisation was always likely to be treacherous and fraught with the risk of policy missteps. Celebrations during Thanksgiving might have been premature as there are stormy seas to navigate before the next holiday. With inflation data for the US due this week, and the heavy weight policy makers meeting next week, it pays to be prudent and have an appropriately diversified portfolio.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 6th December 2021.
© 2021 YOU Asset Management. All rights reserved.
The World In A Week - Beware Greeks Bearing Letters
Written by Cormac Nevin.
Last week markets had a placid start, until Friday, when fears about the discovery of what was dubbed the “Omicron variant” of COVID-19 descended upon markets like a flock of thanksgiving turkeys. The MSCI All Country World Index of global equities dropped -2.4% in GBP terms on Friday, to end the week down -1.9%. Global Bonds, as measured by the Blomberg Global Aggregate Index, were up +0.1% GBP Hedged.
Omicron is the 15th letter of the Greek alphabet and, in a delicious irony, the sharp market selloff on Friday was exacerbated by the third letter of the Greek alphabet; Gamma. This is used to describe the phenomenon resulting from the widespread use of options to make highly leveraged bets on single stock names, particularly by retail traders on platforms like Robinhood. This causes a feedback loop whereby selling begets more selling by dealers and can result in sharp plunges like that which we have witnessed. The US Equity market is currently dominated by this activity, which explains much of the parabolic upside moves in names like Tesla and gives us slight cause for concern about having too much exposure to US Equities.
Events such as last Friday reinforce our conviction in our neutral equity positioning and diversified approach. MSCI Japan was down only -0.2% on Friday, as European and US markets sank – illustrating the opportunities various markets provide. While it is likely too early to say for sure, the Omicron selloff appears to be reversing. Countries are much better equipped to deal with new variants of COVID-19 than they were in the first wave, illustrated by the UK’s quick closure of travel from Southern Africa. In addition, companies like Moderna are already using their mRNA technology to synthesise Omicron-specific vaccines.
Given stretched valuations and the implicit leverage in certain markets, we think events like Friday may become more frequent. It will also likely be even more challenging for markets once central banks stop providing liquidity to an arguably overheating economy. A flexible and diversified approach will remain critical.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 29th November 2021.
© 2021 YOU Asset Management. All rights reserved.
The World In A Week - The price is right?
Written by Millan Chauhan.
Last week, UK inflation data came out revealing that the cost of living rose by 4.2% in the 12 months to October 2021 which exceeded initial estimates of 3.9%. The figure is just over double the Bank of England’s target rate and is now at a 10-year high. The Bank of England decided earlier in November to maintain interest rates at 0.1% and is set to meet later next month on 16th December to assess the domestic monetary policy situation. The sharp rise in inflation has been attributed to rising gas and fuel prices but only marginal increases for items such as food. Hence, price rises are being experienced at billed expenditure level which is often paid by direct debits or prepayments and is arguably less immediately noticeable to the end consumer. However, the price increase seen at a weekly grocery shop level has been much less high, hence consumers may not directly be seeing inflation in the market, but it certainly exists.
Elsewhere in the US, President Biden’s new infrastructure bill was successfully approved by the House of Representatives and signed into law, which on paper is a $1.75 trillion spending plan that includes spending of $550 billion on the country’s bridges, airports, waterways, and public transit lines. The bill will also devote resources towards funding new climate control and broadband initiatives which includes creating more electric charging point terminals.
Finally, numerous states in the EU are re-entering lockdowns or implementing social restrictions following a spike in the number of COVID-19 cases as we head into the winter season. European countries are operating a different severity of restrictions with the Czech Republic’s Prime Minister, Andrej Babis boldly stating that non-vaccinated people would be banned from attending public events and services. According to the European Centre for Disease Prevention and Control, 66% of individuals in the EU region are now double vaccinated but this includes countries with a much slower uptake of the vaccine which has resulted in a much higher number of reported cases.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 22nd November 2021.
© 2021 YOU Asset Management. All rights reserved.
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.
The World In A Week – Inflation – we’re bubbling hot, hot, hot!
Written by Richard Warne.
For those of you as old as me, you may well remember Pato Banton releasing a song called “bubbling hot” back in 1992, and this is how inflation is acting right now. On Friday, the US Consumer Price Index (CPI) came out at a whopping 6.8% year-on-year increase, inflation is at a 40-year high, and both outcomes probably put to bed the notion that inflation is merely transitory.
As the end of 2021 fast approaches, there are many varying factors that markets are getting to grips with. It has only been a few weeks since the discovery of Omicron, the new COVID-19 variant, and this has naturally caught investors’ attention. At the same time there has been huge attention on the Fed’s taper/rate hike plans. However, against these concerns, it must not be forgotten that markets are performing strongly, anchored by robust consumer strength and continued upside of earnings revisions going into Q4 and next year.
Equity markets have been volatile over the last few weeks, and last week saw volatility swing to the upside with most regions posting returns of at least +2.0%, the MSCI All Country World Index was +3.0%, while the UK market delivered +2.2%. Last week’s recovery not only reflected these strong fundamentals but further indicated that investors may be growing increasingly comfortable with an accelerated taper/rate hike timeline to contain what has been some “hot” inflation prints.
Though last week’s US CPI print of 6.8% was eye-watering, it was perfectly in-line with expectations. So, did investors give a sigh of relief that the number printed was not way beyond expectations? However, the inflationary environment is a new reality, as is the ever-increasing spread of the Omicron variant of the virus, so could this have further impact on supply chain challenges? This is a topic that has had much airtime over prior months. Costco in the US reported Q3 earnings last week and comfortably beat market expectations. The Company did comment that 79% of its import containers had been delayed by 51 days on average.
Earnings, valuations, inflation, Fed policy responses, and the continuation of the virus are just a few of the topics the market continues to grapple with as we see out the year and will possibly have an impact on how investors think about positioning for next year.
As this is the last ‘World In A Week’ for 2021, may we wish you all a fantastic Christmas and a Happy New Year. We will return on 4th January 2022.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 13th December 2021.
© 2021 YOU Asset Management. All rights reserved.