What's on the line for first-time buyers?
89% of first-time buyers describe the process as 'really difficult' with deposits, mortgage refusals, and purchases falling through being the biggest struggles. Find out how to make the process smoother.
First-time buyers are facing an array of difficulties due to the pressures of the market as they embark on their home buying journey. According to research, almost nine in 10 (89%) of prospective first-time buyers describe the process as 'really difficult'.
A survey from challenger bank Aldermore revealed there are four key areas that first-time buyers struggle with when they're aiming to buy the perfect starter home.
1. Raising a deposit
Four in 10 prospective buyers cited raising a deposit as their number one obstacle to owning a home. With home buyers taking an average of eight years to save a 20% deposit, according to Nationwide, it's no surprise that it is seen as an intimidating task. To make the process easier, 27% of future homeowners are living with friends or family while they save, and a further 33% would consider it if it sped up the process.
2. Being refused a mortgage
Once a deposit has been saved, it's not the end of woes for first-time buyers. While being refused a mortgage was the biggest concern for just 10% of prospective buyers, a quarter find that their application is initially refused. The findings indicate that it's critical for first-time buyers to assess their financial health and credit score before approaching lenders.
3. Purchases falling through
Having secured a mortgage, almost half (48%) of first-time buyers find that the deal on their first home falls through. With the associated losses of a deal falling through mounting up to £2,200, it's a costly setback. For the 10% that took three or more attempts to secure a deal on a house they wanted, they can find the expenses rival the deposit.
Of those that have experienced purchases falling through, almost two-thirds had to delay buying their first home as a direct result, with 23% putting off the milestone for more than a year.
4. The uncertainty of the house buying process
Next on the list of concerns is simply a lack of knowledge about the steps that need to be taken during the buying process. Some 9% said it was the hardest part of buying a house, with 52% stating it made them ill and 46% saying it caused tension and issues within their relationship. A lack of knowledge can make what should be a time for celebrating unnecessarily stressful but seeking support can help.
How to make your home buying process easier
Despite the challenges of getting on the property ladder, the research also found that, for most, it was worth it. Some 79% of survey participants said that owning their own home made them more financially stable, which is allowing them to plan for the future. For four in five people, it was also considered a bonus that they were no longer wasting money on rent and they believed they would be in a position to move up the property ladder when the time came.
Luckily, there are some steps you can take to improve your home buying process.
- Saving for a deposit: The first hurdle for most first-time buyers is getting the all-important deposit together. With typical deposits being 10% of the property value, it can seem like a daunting task. However, using a Lifetime ISA (LISA), assuming you qualify, is one way to build your savings up quickly. Each tax year you can add up to £4,000 into the account and the government will provide a bonus of 25%.
- Improve and maintain your credit score: Your credit score will dictate what mortgages are open to you. The better your credit score, the more competitive your interest rate will be, it can make a big difference to your monthly repayments and how long it takes you to pay off your mortgage. Taking steps to improve your score, such as clearing debt, making credit card payments on time and registering on the electoral roll should be a priority.
- Assessing location and prices: If you're finding that house prices are out of your range or you're putting in offers that are being beaten, it might be time to reassess where you're looking. A slight postcode change could mean you knock thousands off asking prices, making your first home more affordable.
- Researching types of mortgages: If your first mortgage application is refused, don't panic, there's more than one option available. Just because one mortgage lender says 'no', it doesn't mean that every bank or building society will take the same view. For example, some lenders offer mortgages that require lower deposit amounts or allow you to use a guarantor to access better interest rates.
- Check available help: For first-time buyers that are struggling, it's important to remember that help is available. Often your first port of call will be family. While some first-time buyers are lucky enough to be able to use the bank of mum and dad to gather a deposit, others aren't but acting as a guarantor and simply offering advice can still be invaluable.
The government also provides support for first-time buyers, for example, through the Help to Buy equity loan scheme, which can give you access to up to 20% (40% in London) of the property value to minimise the mortgage needed.
If you're embarking on your journey to buy your first home, talk to us for more information on how to make the process smoother from beginning to end.
The six biggest money worries for millennials
Money concerns are a big worry for the millennial generation as they make plans for life milestones. But what areas can they improve to reach financial resilience?
Money concerns are harming the millennial generation's ability to plan for the future due to poor finance education in schools, new research from Samuel & Co Trading has revealed.
Despite calls for financial education to be taught in schools alongside other core subjects, it is yet to be added to the curriculum. As a result, there is a high chance that young adults who are taking their first steps on the housing ladder, starting families, and planning for retirement are feeling put on the back foot when they look at their finances.
The research questioned 1,000 British citizens to discover the problems they have with understanding basic finance. It revealed seven money worries for the millennial generation.
1. Saving for unexpected costs
Life throws frequent obstacles at families, including those that require money to smooth over. From the boiler breaking down to being unexpectedly made redundant, as well as illness, injury, or even death, there are many instances where having a financial buffer can help. We all know we should have some money put aside to cover unexpected outgoings. However, the study found that it's a safeguard many millennials are missing.
According to the survey results, more than two in five (43%) Brits aged between 18 and 24 do not have any savings at all to cover unexpected costs. Whether you recognise your financial situation in that statistic, your children's or even your grandchildren's, not having the money to cover unexpected costs can push people into debt, harm their lifestyle, and cause unnecessary stress. Building up a savings account that is there should they ever need it can give millennials peace of mind.
2. Planning for the future
The survey found a lack of financial planning for the future was an issue that affected individuals of all ages. When asked if they had a five-year financial plan, 77% of women and 47% of men admitted that they didn't.
For the millennial generation, a five-year plan is likely to focus on getting on the housing ladder but should include other areas too, such as beginning to build up wealth through a LISA or Workplace Pension. Armed with a plan and financial goals for the next five years, you are far more likely to be in a better position over the long-term.
3. Understanding pension and tax outgoings
Some 78% of women revealed they did not know how much they paid into their pension every month and 35% didn't know how much tax they paid. The survey found that half of the men questioned were not sure of their pension contributions and 45% did not know the amount of tax they paid out of each pay cheque.
With auto-enrolment meaning the majority of millennials will now be paying into a pension, it's vital to understand salary outgoings that are applied to each payslip. Taking the time to review pension contributions and understand the income they'll provide for your financial future can help set you on the right path financially.
4. Confidence managing money
Across survey participants, it was found that many Brits do not feel confident managing their money. In fact, a lack of financial knowledge has led to a quarter of women feeling ill at ease when considering their money and 14% of men feel the same. With money concerns having implications across numerous areas, including health and mental wellbeing, taking steps to improve knowledge of the most common areas can have a hugely positive impact.
With a greater level of confidence when managing money, you will be in a better position to take control of your finances and ensure your actions reflect longer-term aims.
5. Knowledge of credit cards
Credit cards are a commonly used way to access credit when you need it. They're often used as a way to make big-ticket purchases, cover unexpected outgoings, and build up a positive credit rating.
Yet, despite this, 28% of women and 21% of men stated they did not understand the terms and conditions of their personal account.
Getting the most out of a credit card and minimising charges placed on purchases and balance transfers means it is important to understand the finer details. While reading terms and conditions can seem like a daunting task, it is one that should be considered critical.
6. Getting to grips with financial vocabulary
If financial jargon leaves you feeling confused, you're not alone. Six in 10 women and 38% of men, stated during the survey that they didn't understand financial vocabulary. It is a lack of knowledge that can hinder their confidence and ability to order their finances in a way that suits their lifestyle and plans.
Working with a professional that explains finance matters in a clear, transparent way can help you get to grips with your money. Understanding the most commonly used finance vocabulary will have a positive influence on the other common money worries millennials face too, from understanding the terms of a credit card to feeling confident on financial matters.
To gain a better understanding of your own finances or to help your child or grandchild plan their financial future, please get in touch with us.
Interest rates rise above 0.5% for the first time in a decade
The Bank of England (BoE) has increased interest rates above 0.5% for the first time since 2009.
Today, the Monetary Policy Committee (MPC) voted unanimously to push up the base rate by 0.25% to 0.75%.
That's not a massive increase; savers aren't going to suddenly start seeing real returns on most of their bank or building society accounts and it won't cause significant pain to most mortgage holders.
However, coupled with the 0.25% increase in November last year, it is another warning shot that interest rates aren't going to stay at record lows forever and that those with debt should prepare for further increases.
So, how will today's rise affect you?
If you are a saver…
You will hopefully see the increase passed on in the form of higher interest rates.
Nevertheless, it's probably too soon to get over excited. With inflation (as measured by the Consumer Prices Index) currently at 2.3%, you would currently have to tie up your savings for at least five years to get a 'real', above-inflation return. However, tying up capital for that amount of time isn't without risk and is something to think carefully about doing, before making a commitment.
However, we expect savers will welcome any increase in interest rates with a small cheer, even if they aren't breaking out the bunting just yet!
If you are a borrower…
How you're affected by a base rate rise will depend on how you are borrowing money.
If you have a tracker mortgage, where the interest rate is pegged to the BoE base rate you can expect your monthly mortgage payment to rise almost immediately. The same is almost certainly true if your mortgage is arranged on your lender's Standard Variable Rate (SVR). If you have a fixed-rate mortgage, you won't see any immediate change to your monthly payments, because as the name implies, your interest rate is fixed and won't change for the duration of the product you selected when you took the mortgage out. However, the pain may only be delayed until your fixed rate ends, at which point your payments may rise due to the increase in interest rates which occurred during the period of your fixed rate.
Whether you are immediately affected or won't be until the end of your fixed rate, all mortgage borrowers should start to prepare for further interest rate rises.
There are three key things to do here:
Check your mortgage deal: Use comparison tools or ask your financial adviser or planner to help you to work out whether you are currently receiving the most competitive rates available on the market. This may mean considering a fixed rate, which will protect you from further interest rate rises for a period.
Review your household expenditure: This will help you to understand whether there are any items you can cut back on to create surplus income which could be allocated to higher mortgage payments should rates rise again. Then, you can begin to benefit from making those cutbacks straight away, potentially using the extra income for your emergency fund.
Build and maintain your emergency fund: If you don't already have one in place, now is the time to take steps to build up an emergency fund. This could help you to recover as and when further interest rate rises take effect, or, as the name suggests, bail you out in a financial emergency.
Should we expect further rate rises?
The BoE Governor, Mark Carney, signalled that three further rate rises will be needed to avoid the rate of inflation remaining above 2% over the next three years.
The report released following the announcement clarifies this: "The Committee also judges that, were the economy to continue to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2 per cent target at a conventional horizon.
"Any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent."
Going away? Don't forget your travel insurance!
We're always talking about long-term financial planning, however, as we reach a time when those with children might be taking advantage of lower cost holidays, we thought it sensible to talk about travel insurance.
Did you know that almost half (49%) of British jet-setters don't take out travel insurance at the same time as booking their trip? And 23% don't take any at all.
There were 72.8 million overseas visits from the UK in 2017 (Source: Office for National Statistics (ONS)), and half of those were unprotected.
Cutting it close
While many aren't buying insurance at the same time as making travel arrangements, they won't all be completely unprotected, as some will buy at a later date. However, the closer to their departure they do leave it, the longer they are at risk of losing money if their travel is cancelled or needs to be rescheduled. According to research from Aviva:
- 24% buy insurance shortly before their journey: Putting them at risk of financial loss if anything goes wrong before that time.
- 2% buy their insurance at the airport, just before they take off: By this point, your holiday is already underway and there is not much time to consider the terms you are agreeing to, or to shop around for better coverage or prices. You are effectively given take-it-or-leave-it options.
However, some insurance is better than no insurance…
For the 23% of people who do not take out travel insurance at all, a cancelled flight, injury or illness means that they are likely to lose all the money they have put into the holiday, as well as potentially facing further costs if they need to access healthcare or re-arrange the return leg of their journey.
What do people believe about travel insurance?
The research has shown that there is a stark difference between the role travel insurance plays in holiday planning, and what travellers expect it to be able to do for them. For example:
- 12% of people believe travel insurance will cover the cost of their holiday if they are unable to go due to a pet dying the day before departure
- 6% think they will be able to claim a refund through their insurance if they oversleep and miss their flight
- 4% believe they are covered if they miss their flight due to an excess of drinking or shopping in the airport
Unsurprisingly, none of these situations is covered by travel insurance.
So, what does travel insurance do?
Travel insurance is usually offered as a package which covers:
- Travel interruptions, delays and cancellations
- Lost luggage
- Medical cover and evacuation
Other options may be available, but this will vary between providers.
Adam Beckett, Product and Propositions Director, Aviva UK General Insurance, explains: Travel insurance provides important protection before you go away, say if you, or a close relative, falls ill. It's also there for medical emergencies while abroad which can be very costly, or if your belongings are lost or stolen. It's important to get the right protection for your needs so you can relax on holiday knowing you are fully covered.
How big is the risk?
Travelling without insurance poses a risk to your wellbeing; physically, mentally and financially.
The research shows that the most common reason (33%) for making a claim on travel insurance is a medical emergency, at 33%. If you fall ill while in another country, you may be in for a shock. Most places do not benefit from the generous healthcare system we have in the UK. Even in countries where care is free 'at the point of service', treatment is often followed by large bills.
Of course, a European Health Insurance Card (EHIC) is useful when travelling within those areas, but, it may not be enough, and it is likely to be ineffective in a few years anyway.
Some examples of claims made last year include an individual who suffered from a stroke in the USA and claimed £182,000 in medical bills, and a pneumonia case in Malaysia, which was awarded £191,000.
Of course, if you can pay those kinds of bills out of pocket, you don't need travel insurance. But, if that kind of money makes your eyes water, make sure you're covered from the point of purchasing your tickets.
What should you do next?
If you have a trip planned and have not yet bought insurance, your first step should be to put that right, as soon as possible.
Once that is in place, you need to think about other decisions which might need to be made in your absence. As much as we hope your holiday goes smoothly and you return to the UK unscathed, it is a good idea to have a will and Lasting Power of Attorney (LPA) in place, to ensure that you are covered in all possible situations.
Why?
A will dictates what happens to your belongings, dependents and property when you die. It means that your family avoids the lengthy process of having your estate distributed according to the laws of intestacy. Having a will in place means that your assets are given to the people you want to have them.
LPA gives someone you trust the authority to make decisions on your behalf if you are unable to, due to mental or physical impairment. There are two types of LPA; those who make decisions about healthcare and those who are responsible for financial decisions. If you are in a coma or seriously ill, the people you have appointed LPA will make choices based on your wishes and in accordance with your best interests. It is important to make sure that you discuss your wishes with the people you appoint LPA to, so that you can be confident that any arrangements made on your behalf will reflect the things you want.
It might sound a bit morbid, but once you have your protection and paperwork in place, you will be able to enjoy your holiday that little bit more, knowing that you have done everything you can to ensure you and your family are protected in all scenarios.
All or nothing? Three reasons to keep (some of) your pension invested
One in ten people who plan to retire this year expect to withdraw their entire pension savings as one lump sum, according to research by Prudential.
Is that a bad thing?
It could be.
While everybody is free to make their own decisions about their money; withdrawing all your pension, or taking too much, too soon, could land you with a large and unexpected tax bill in the short term, as well as causing financial hardship in the future.
The research shows that 20% of those planning to retire in 2018 may pay unnecessary tax bills, while 10% plan to take their entire pension as a lump sum.
We are concerned that these people may be making mistakes with their pension, which, while not immediately obvious, may cause difficulties in the future.
We believe there are three key reasons why you should keep some or all of your money invested in pensions:
- Avoiding an unnecessary tax bill by taking more than you need: By taking a sustainable income, you minimise your tax liabilities and increase the chances of your pension providing an income for the rest of your life; and potentially that of your spouse. Taking more than you need could trigger an expensive tax bill which will see your money go to the taxman, rather than continuing to provide an income for you and your family.
- Pensions have benefits: By keeping your money invested in a pension, you can continue to benefit from:
- Tax-efficient growthMoney kept in a pension grows tax efficiently. By moving this money into a savings account, you remove the possibility of seeing much growth at all, as well as ensuring that any growth above this limit will mean that you lose some of those returns to the taxman, anyway.
- Death benefitsAny money remaining in your pension when you die can be passed on to your nominated beneficiaries and is usually free from Inheritance Tax. By comparison, money held in savings accounts forms part of your estate, and if the total value of your belongings is above £325,000 (or £650,000 if you are the remaining partner in your marriage and your spouse left everything to you) your beneficiaries will be charged IHT at a rate of 40% on anything over the threshold.
- Continued contributionsAs long as your pension remains active, you can continue making deposits into it. That means, if you choose to continue working on a part-time or consultancy basis while retired, you could continue to boost the value of your pension fund to either pay for care in later life or leave a bigger legacy for your loved ones when you die.
- Avoiding investment mistakes: There are two common investment mistakes made by those taking money out of their pension unnecessarily:
- Withdrawing money to put into a savings account: This has several potential downfalls. First, you could incur a large tax bill if you take out more than the 25% tax-free lump sum. Second, by putting that money into a normal savings account, you almost guarantee that it will lose value in real terms, as interest rates are currently below inflation and that doesn't seem likely to improve anytime soon.
- Withdrawing money to invest in property: Lots of people believe that property is a sure-fire winner and that all property investments will generate huge returns. In fact, there is no guarantee of that. The only thing you can be sure of when doing this, is that you will trigger a tax bill when withdrawing the money, to then invest in a single asset class; which is also taxable.
What is that money being used for?
Of those who are making big withdrawals from their pension pots within the first year of retirement, 71% are likely to invest in property, put it into a savings account or invest it. The other 29% are looking to spend the cash, with:
- 34% using it to go on holiday
- 25% planning home improvements
- 20% giving financial gifts to children or grandchildren
Of course, there's nothing wrong with treating yourself and those you love when possible, but, by taking more than the 25% tax-free limit, you put yourself at risk of using more money than planned and leaving yourself short in the long term.
What can you do with your pension fund?
When accessing your pension, you can now use some or all of it to:
- Buy an annual guaranteed income, such as an Annuity
- Create a Flexi-Access drawdown arrangement, which lets you make withdrawals as and when you please
Any money you don't convert into retirement income this way can either remain invested in your pension, or you can withdraw it and put it into a savings account.
We'd suggest leaving it where it is.
What happens to pension funds which are put into savings accounts?
Taking that money out of investments and putting it into a Cash account will do two things:
- Remove any possibility of growth beyond the bank or building society's interest rate. This is likely to be below inflation and will mean that your money loses value in real terms
- Make you more likely to incur tax bills if you use the money at a later date.
Retirement planning is a big part of your overall financial plan. It needs to include provisions to support your desired lifestyle when you leave working life behind, as well as containing any strategies you will use to make sure that you can leave some money or assets behind for loved ones.
Therefore, your retirement plan should involve the most useful and productive strategies to meet your aspirations and goals for both you and your family.
For more information, or to begin planning your retirement, please get in touch with us.
How long will your pension last? Five tips to maintaining your retirement income
28% of retirees could see their pension fund run out long before they die, according to the Pensions Policy Institute and Legal & General.
Why?
There are several major factors which affect how long your pension will last in retirement:
- How much you take each year
- How long you will live
- Investment performance and charges
Life expectancy is the trickiest part of this to calculate, as national averages and calculators can only take you so far. Unless you have a working crystal ball, you won't know what age you will die until it happens, and by that time, it will be far too late to put a plan in place.
There are many factors which can affect your life expectancy, including your lifestyle, your general health and even your gender and location. Therefore, it is important to have a plan in place which will ensure that you can afford the lifestyle you want, for as long as you need to.
How can you do that?
It all comes down to planning, but there are five key things you can do to make sure that your retirement is as comfortable as possible, whether it lasts 10 years, or 40:
1. Only take a sustainable level of income
Understanding how much you need to live on will help you to strike a balance between your withdrawals and the sustainability of your pension. Know how much you will need to take in income, and whether you will access a lump sum for any reason. Talking to a financial planner or adviser will help you to understand how the two work together and what needs to be done to ensure that your finances are sustainable.
2. Understand life expectancy
There's no sure-fire way to know exactly how long you will live, but it is possible to make an estimate based on national averages. You will need to factor in your lifestyle, occupation and general health. There are many calculators available to help you with this, including this one from Aviva.
Your plan will need to cover all eventualities; providing an income which will support your lifestyle for as long as you are retired. That means having provisions in place to ensure that you can afford any care you may need in later life.
3. Factor in inflation
Over time, inflation can erode the buying power of your retirement income, especially if you buy a level Annuity, which will not increase each year to keep up with the rising cost of living. That means, to create a sustainable income, you will need to position your money so that it has the opportunity to grow or use products which guarantee that your retirement income will keep up with inflation.
4. Consider the cost of care
Many people assume that their living costs will remain largely flat, or gradually decline, throughout retirement. But, that's not true for everyone. In fact, most retirees are likely to see their general expenses rise toward later life due to the cost of care.
You will need to think about the type of care you want in later life, as the cost will depend on the intensity of your needs. For example, research from UK Care Guide shows that the average weekly cost of care can range from £250 for basic services, such as occasional home care visits, to more than £1,000 per week for some care homes.
You will need to factor these costs into your retirement planning. Therefore, it will be helpful to talk to a financial planner or adviser who can help you to incorporate the possibility of paying for care, into your financial strategy.
5. Decide what happens when you die
If you are planning for your money to last for the rest of your life, it is likely that there will be some left over when you die.
That means that you need to make decisions about what will happen to that leftover money. That's where a will comes into play.
If you do not yet have a will in place, this is the sign you have been waiting for that it is now time to write one. If you do have a will in place, that's great, but your job is not done yet. Take this opportunity to review the will you have in place and make any adjustments that may be needed. Especially if you have started your retirement planning, as it may no longer make sense.
Talking to an adviser or planner can help you to make all these decisions and more. Further still, a professional will be able to apply their skills, experience and expertise to the situation to offer suggestions which you may not have come across previously. To discuss your retirement planning in more detail, please get in touch with us.
Record numbers of people are making pension withdrawals
The number of people using Pension Freedoms to make withdrawals from their pensions reached an all-time high in the first quarter of 2018, with 222,000 taking an impressive total of £1.7 billion.
Current trends
Of the pensions accessed under Pension Freedoms, research by AJ Bell found that 53% have been fully withdrawn. In isolation, this figure is concerning for the longevity of the individuals' retirement, but it's likely people have more than one pension, and expected they would withdraw the smallest first.
In fact, 90% of fully withdrawn pensions were worth less than £30,000; not insignificant, but hardly blowing it on 'a Lamborghini' territory, as Steve Web, former Pensions Minister suggested you could do!
The research also found that average annual withdrawals were £6,612 from an average pension fund of £104,000. Whilst taking 6.4% of the value a year doesn't sound too detrimental, without considering investment returns, this modest annual income would exhaust the fund in less than 16 years.
Most concerning is the revelation that 41% of retirees are making withdrawals of over 10% a year. Their pensions are likely to be depleted in under eight years, leaving a serious shortfall, potentially meaning they have to return to work or downsize property.
What level of income is affordable?
To determine your realistic retirement income, the first consideration will always be the value of your pension accumulated. However, there are other influences. Individual circumstances do vary, but here are four, often overlooked, points;
1. Lifespan
Recent research from Retirement Advantage has found that almost 80% of people over 50 significantly underestimate their lifespan. On average, men and women aged between 50 and 64 expected to live to 82 years old. Statistics suggest their actual expectancy to be 88 and 90 years old respectively.
2. Lifestyle
You'll want to enjoy your extended time away from the workplace to the utmost. Consumer group Which? propose that retired couples wanting to enjoy holidays and purchase a new car every five years (as well as the daily essentials), will need around £39,000 a year. Your State Pension will make up some of this figure, but can your personal pensions cover the rest?
Reflect on your lifestyle and regular commitments now, you ideally won't have any mortgage liability to take in to retirement, but what monthly commitments are likely to continue? How do you intend to spend your new-found time? Golf clubs can be expensive!
3. Hidden costs
Nobody likes an unexpected bill through the letterbox, but there are potential costs in later life you may not have considered.
The likelihood of needing long-term care is increasing with life expectancy, and the average nursing home costs around £40,000 a year according to the Money Advice Service. Care costs can be difficult to predict, but understanding best and worst case scenarios helps you plan for either.
In contrast, if you are fortunate enough to be in great health, you are more likely to be travelling, enjoying new hobbies and spending. You may spend as much, if not more, than the cost of care.
Inflation is also very important; holding only cash deposits rather than an invested pension fund (as the FCA report 33% of non-advised retirees are doing), means that in real terms your pension will lose purchasing power.
4. Market conditions
We have experienced a nine-year bull run and markets are near an all-time high; complacency towards market fluctuations may have set in. According to the research, those approaching or already in retirement expect a gross annual investment returns of almost 6%. If markets were to take a down turn, the levels of withdrawals currently taken would quickly become unsustainable.
Why financial planning matters
Retirement planning is much more complex since Pension Freedoms, thanks to significantly more options now available to you. Couple this with comprehending your own longevity, realistic spending and understanding how market fluctuations could impact you, it's clear that professional financial planning is more relevant and valuable than ever.
This is where we come in; at Beaufort Financial, our service combines the 'art' of knowing and understanding your life goals, with the 'science' of identifying the best financial solutions to help you to achieve them.
If you would like to discuss your retirement options, please get in touch.
Six reasons to write a will even if you think you have nothing worth inheriting
61% of UK adults do not have a will in place, according to Which?. A fifth of those say they have not written a will as they have nothing worth passing on.
However, a will does so much more than just pass on material and financial assets. It is also used to help let those left behind know your wishes and could be the best way to ensure that they are followed, after you die, these can include:
1. Who oversees your estate
You need to choose who will be the executor(s) of your estate. They will take charge of it and make decisions on your behalf. You can appoint up to four executors but, as they need to make decisions on a joint basis, fewer may be more practical. Executors must be over the age of 18 and it is possible for them to also be beneficiaries of the will.
The executor(s) of your estate will be responsible for following the requests made in your will to the best of their ability.
2. Who cares for your dependents
If you have children or are responsible for looking after vulnerable adults, you can include instructions for their care in your will. This may include who will look after them and where they will live. It is obviously important to involve any potential carers in this decision, as they will need to be prepared for the responsibility and agree to it.
As an aside, nominating someone to look after dependents is only half the job. Making sure that those people have the financial resources to provide the level of care. Therefore, making a will is a good time to make sure your Life Insurance and financial protections are sufficient, and trusts are set up to ensure that the capital paid on death is put in the right hands at the right time.
Aside from human dependents, you can also include instructions for the care of pets in your will. But again, make sure the person or people you nominate are willing to take on the responsibility.
3. What happens to sentimental items
Even if you think you don't have anything of financial value to pass on, you shouldn't underestimate the importance of sentimentality. If you have belongings which you want to be passed on to specific people, you can include this in your will. You may even want to add instructions for how you want your belongings to be passed on in the future. Though there is no guarantee that they will be followed.
4. Where your money goes
Your estate may not be worth anything right now, but life is quite unpredictable and there is no way of knowing how much will be left when you die. It's unlikely to happen, but many of us have heard the story about a man who hits the jackpot, only to pass away 24 hours later. Once your estate has been settled, i.e. any costs have been taken out of the money you leave behind, there may be some left, and you will need to leave instructions as to where it goes.
5. Whether you make a charitable donation
You may decide that any money left in your estate once it has been settled is to go to charity. Including it in your will is the best way to continue supporting a cause you are passionate about.
Charitable donations are immediately outside of your estate for Inheritance Tax (IHT) purposes. So, if you had suddenly come into enough money to put you over the threshold, a donation could protect your loved ones from a large tax bill.
6. What happens to you
It's not a cheerful thought, but some may find comfort in deciding what will happen to their body when they die. You can also include specific instructions for your funeral arrangements, such as music you would like to be played, the clothes you wear and who will be your pallbearers.
What happens if you die without a will in place?
If you don't have a will, or your current will is not valid when you die, your belongings and estate will be left intestate. That means that the laws of intestacy will determine how your assets are distributed, who cares for your dependents and what happens to any belongings you have.
Of course, there's a good chance that those decisions will not be in line with your wishes. It will also mean that your loved ones will be subjected to a much longer, more stressful process than if they have a will detailing your wishes available.
What should you do now?
Six things:
- See if you could be missing out on other ways to pass money onto loved ones, this may include, Death in Service benefits at work or your pension provisions.
- Write a will. If you're not sure where to start, get in touch with us for help or contact your solicitor. Alternatively, see if Will Aid is for you.
- Talk to your loved ones about your wishes and any responsibilities you wish to pass onto them.
- When it's written, make sure your will is kept in an accessible place and tell people where it is. If possible, try to make sure any important documents that the executor of your estate will need, are with it, that includes details of your accounts, insurance documents and your identification, such as passport and birth certificate.
- Pass the message on to your family and friends and encourage your loved ones to be equally as prepared.
- If you already have a will in place, you're not done yet. You need to make sure that it is up to date and valid.
It is recommended that you review your will regularly and at major milestones, such as:
- If you get married
- If you get divorced
- If a new baby joins the family
- If you receive a financial gift or inheritance
- If your circumstances change
- If you want to change your beneficiaries
It is often overlooked that milestones such as getting married can invalidate a will, and other changes may mean that the decisions you made previously no longer reflect your priorities, so maintaining your will can be just as important as writing it in the first place.
For more information and help with writing or updating your will, get in touch.
10 signs it's time to get financial advice
How often do you wake up with the intention of getting financial advice as your number one priority?
For almost everyone, the answer is never. Rather, the urge to seek financial advice is usually triggered by an event, or idea.
According to research from the Financial Conduct Authority (FCA), less than one in 10 UK adults (6%) have sought regulated financial advice relating to investments, pensions or retirement planning, while a quarter are likely to need it.
This is a shame, as we see on a regular basis the benefits our clients get from seeking advice. However, we recognise there are many reasons why people don't get in touch.
For example, across the country, an average of 34% of people do not know where to start looking to find a financial adviser, should they need one. If you are one of them, you'll find our contact details at the top of the page!
But what might push you to make the call?
It could be anything, but here are 10 of the most frequent 'triggers' we hear:
1. I've received a letter.
Whether it's a pension statement, valuation of investments or any communication regarding your finances, something landing on your doorstep could be the pivotal factor in deciding to seek financial advice. Whatever you've received, bring it to us and we'll explain what it means for you and your future.
2. I don't want to go to work today, can I retire instead?
In the years before the State Retirement Age, it can be tempting to pack it all in early. Especially if you've overdone it at the golf club over the weekend and are facing an early Monday morning start. We can help you to understand if your finances are in the right place to bring retirement to you, sooner rather than later.
3. My friend has been talking about their financial planning, can I do what they're doing?
Just because your friend, colleague or even spouse is doing something, doesn't mean it is the right decision for you as well. However, by seeking advice, you can find out whether it truly is the best option available, or if there are other methods and products which may be better suited to your needs and circumstances.
4. I want to buy a car/house/helicopter… can I afford it?
Making a large purchase is a great feeling, especially if you've been planning it for a while. But it is wise to stop and think before diving into a big shopping spree, let a professional walk you through the consequences of spending that money and project your financial position afterward to see if it is a sensible purchase to make.
5. A new baby has been born into the family, I want to put money aside for them.
Saving for the future is important, and the earlier money is put away for someone, the longer it will have to potentially perform well. Starting to save or invest for a new-born is particularly prudent and there are many options available, some of which may be better suited to your family than others, so why not let us talk you through them?
6. I've been diagnosed with an illness and I want to make arrangements just in case.
It's not a fun topic, but getting your estate organised is something everyone needs to do, regardless of age or health status. Talking to a financial planner or adviser can help you to make sure that your money and assets are not only given to the right people but that your estate is distributed in a tax-efficient way.
7. I want to start my own business.
If you have an entrepreneurial idea that you want to make reality, you will first need to find funding. It may be possible to source that yourself, using savings and investments, or you may need to access credit to get your venture off the ground. Either way, we can analyse your current situation and help you to find the right strategy to meet your goals.
8. I want to leave a business I own.
On the other hand, maybe you have already grown a business to success and now it is time to put your feet up and let the next generation take the reins. Navigating your way out of a business can feel like more hard work than building it up in the first place. Talking to a professional can give you the peace of mind of a second pair of eyes on the paperwork, as well as the confidence that you are in the hands of a professional who is on your side throughout the process.
9. I've received some inheritance, what should I do with it?
If you have received a large amount of money, you may be wondering how you can use it most effectively. Alternatively, you may simply want to know if you can afford to spend it all straight away and enjoy the freedom for a while. It is likely that the most sensible solution will be to put most of it away in savings or investments, while allowing yourself to spend a portion of it. The amount you can afford to spend right away will depend on your circumstances and plans for the future, so contact us for a more personalised answer to this.
10. I read an article that scared me!
The media is full of stories which can make you feel like the world is against you, or a financial scam is always just around the corner. A financial adviser or planner will be able to separate fact from sensationalism and give you advice on ways to protect yourself against any real dangers to your financial wellbeing.
Whatever it is that has you considering taking financial advice, please get in touch and let us know how we can help.
Early days: Upturn in young adults saving for retirement, but millions still lag behind
The number of under-30s saving enough for retirement has increased from 30% to 39% in the past year, likely due to automatic enrolment in Workplace Pensions, according to Scottish Widows.
That's good news, but still leaves 61% of young adults saving too little, or nothing at all, for later life.
To find solutions to this issue, it is important that we understand why young people are not saving enough, so that we can offer ways to improve their financial outlook.
Naturally, while many of us are young at heart, the years of 18-30s holidays are likely to be behind you. Nevertheless, this information could be useful to pass on to your children, or even grandchildren.
The reasons behind the savings drought
1. Exclusion from Workplace Pensions
Automatic Enrolment means that anyone who is:
- A UK resident
- Between 21-years old and State Pension Age
- Earning over £10,000 per year from a single employer
will be included in a workplace pension, which is subject to minimum, monthly employer and employee contributions, of 2% for employers and 3% for employees, which will increase in April 2019 to 5% employee and 3% employer contributions.
However, those who do not meet this criterion often have no pension provisions. This can include people with multiple jobs, those on zero-hour contracts, contractors and the self-employed.
Retirement expert at Scottish Widows, Robert Cochran, said: It's encouraging that more young people are saving enough for a decent retirement and auto-enrolment has played a really important part. However, auto-enrolment was designed as a safety net for a country facing a pensions crisis.
Some of the hardest working and most financially vulnerable members of society are slipping through the auto-enrolment net because of minimum earnings thresholds. This unfairly impacts multi-jobbers, who could be working the equivalent of full-time hours, yet without the financial benefit of having a single employer.
The solution: anyone who is aged 16 and over, earning a minimum of £5,772, can request to be enrolled in their employers' Workplace Pension scheme. Their pensions will attract the same benefits as those who are automatically enrolled, including employer contributions and tax relief. Remember that's effectively 'free money'.
For contractors and the self-employed, other types of pension are available. Of course, they will not benefit from employer contributions, but pensions are tax-efficient, and the tax relief makes them a sensible way of saving for later life.
2. Relying on minimum contributions
For young adults who are enrolled in a Workplace Pension, complacency is a big danger.
For the 2018/19 tax year, the minimum contributions stand at 3% for employees and 2% for employers. In April 2019, this will increase to 5% employee and 3% employer. If young adults assume that those contributions will be sufficient, they are likely to face the shock realisation that they don't have enough money to support their retirement. Unfortunately, by the time this becomes apparent, it may be too late to change the outcome significantly.
As an example, the average salary for full-time employees is £26,416 (Source: Office for National Statistics(ONS)). The minimum contributions, based on qualifying earnings between £6,032 and £46,350, will mean that:
- In the 2018/19 tax year, employers will contribute £33.97, and employees £50.96, including tax relief, per month
- From April 2019, employers will contribute £50.96, and employees £84.93, including tax relief, per month.
Someone putting away those minimum amounts might believe that they are on track, and over 40 years, you could build a retirement fund of £171,000, assuming a return of 2.5% per year.
That sounds like a lot of money.
Unfortunately, it's not enough.
If that fund were turned into a sustainable income, for example by buying an Annuity, it would potentially be able to secure approximately £4,470 per year. Even in conjunction with the State Pension, it is unlikely that will be enough to support the desired retirement lifestyle of a current under-30.
Worse still, that's without any provision to pass that fund onto a spouse or beneficiary on death and does not leave any flexibility to take a lump sum from the fund, if needed.
The solution: Calculate how much is needed for a comfortable retirement and begin working toward that goal from a young age. It is possible to voluntarily increase employee contributions, although employers are unlikely to match it.
It may also be worth considering making lump sum contributions when possible. This includes receiving inheritance or financial gifts.
3. Underestimating the importance of retirement savings
Some young adults may simply not regard retirement saving as a priority. There are four root causes of this:
- They feel they are too young to start preparing now
- They can't afford it
- They don't trust pensions
- They would rather put their spare money toward more short-term goals, such as buying a house or starting a family
For the first group of people, retirement might seem like it is so far into the future that they will have plenty of time to think about savings in later life. However, when they reach a stage in life where planning for life after work becomes a priority, they will wish that they had started saving earlier to give themselves a head start.
Those who are saving for lifetime events in the order which they happen may find that some goals need more time than others. While it is sensible to prioritise buying a home, it may be worth ensuring that some money is being put aside for retirement at the same time, even if it is only small amounts. Remember, every month you're not in a Workplace Pension is a missed opportunity to gain 'free money' in employer contributions and tax relief.
The solution:
It is important to use the right product for your needs.
Prior to making any decisions, you must understand your goals and whether they are short-term or long-term aims. Following this, you will need to analyse your budget and allocate it in sensible proportion to those needs.
For example, when retirement planning is a priority, you are likely to be putting money into a pension. That means making the most of your Workplace Pension and maximising your contributions.
When working toward buying a property, you may turn to a Lifetime ISA (Individual Saving Account). This is a tax-efficient account into which you can deposit up to £4,000 per year. A government bonus equal to 25% of the year's deposits is also added each year, boosting the amount saved.
Lifetime ISAs can be opened by anyone aged 18-39 and contributions can be made until the account holder turns 50. These accounts are available in both Cash and Stocks & Shares.
Withdrawals can be made from a Lifetime ISA to pay for the deposit on a first home, and to be used as a retirement income once the account holder reaches the age of 60, without incurring penalties. All other withdrawals will be subject to a 25% penalty.
If you are primarily planning to buy a house, your Lifetime ISA may receive most of your savings. However, by enrolling in a Workplace Pension you can ensure that you are putting some money aside for later life at the same time.
We all want the best for those we love, and with the State Pension feeling increasingly out of reach, starting to save for later life is becoming more and more of a priority. If someone you know is likely to be struggling with savings, now is the time to talk to them, or potentially have them engage with a financial planner or adviser for more guidance. For more information and advice, get in touch with us.