Longer lives and retirement plans
Retirement is a huge milestone and one that's lasting longer for many people. You now have more choice around when you want to retire, how to take an income, and what you want to do after you've given up work. Whilst more flexibility has certainly been welcomed, it can present you with some challenging decisions too.
Retirement used to be associated with kicking back and taking it easy. That might still be an important part of what you're looking forward to. But, today, retirement is just as likely to be associated with new experiences. It's not just the retirement lifestyle that's been transferred over the last few decades either. As life expectancy has increased, our time after working lives has gotten longer too. It's not uncommon for people to spend 30 or even 40 years in retirement.
On top of these two key factors, the way we take an income in retirement has changed as well. The introduction of Pension Freedoms in 2015 gave retirees far greater flexibility when they decided to access the money saved into a pension. It means retirement no longer follows a fairly similar path for most; retirement can be what you make it.
Financing a longer retirement
When you think about retirement planning, it's often the financial side that first springs to mind. That's natural, after all, it's your finances that will allow you to achieve aspirations you may have.
Spending longer in retirement will clearly have an impact on finances, as they'll need to stretch further. As a result, you'll need to think carefully about how you'll access the provisions in your pension and how you'll use other assets. Purchasing an Annuity, which provides a guaranteed income for life, can offer security, but it may not suit your lifestyle.
On the other hand, your pension can remain invested and accessed flexibly using Flexi-Access Drawdown. But you'll need to ensure you're accessing your pension in a way that's sustainable and considers life expectancy. If you only plan to make withdrawals for 20 years but end up living for another decade, it could place you in a financially vulnerable position.
Your life expectancy is a crucial part of calculating a retirement income and setting out your goals. However, it's not just finances that should be considered in a longer retirement.
When and how to give up work
Have you thought about when you'd like to give up work? You may have a firm plan or a rough idea in your head, but if you've not considered life expectancy, you're missing a crucial factor. If retiring at 60 means you'll have four decades of not working, would it still appeal to you? For some, that will sound like a dream, but for others, it will give a reason to rethink.
In addition, you should think about how you'll retire. More workers are attracted to giving up work gradually. Whether it's cutting down current working commitments or launching a business, blending retirement and work is becoming more common. You may even decide to give up work entirely for a set period of time, before returning to the world of work further down the line. When you think about longer retirements, it makes sense that some will want to continue employment in some way once they pass traditional retirement age.
Filling your time in retirement
How do you plan to fill your days when you've retired? What one-off experiences do you want?
Answering these questions is important to create a retirement lifestyle that suits you. Perhaps you're looking forward to spending more time with grandchildren, have grand plans to travel, or want to invest your free time in a hobby that's been neglected.
However, whilst retirement is a time to look forward to, will you still be happy and fulfilled a few years into it? This is where planning your lifestyle is important. Retirement can promise much, but leave something to be desired if you don't think about what's important to you and set out priorities. Keep in mind how long you're likely to spend in retirement as you set out making plans that will fill your time.
Of course, the above considerations are still linked to finance too. If you'd like help understanding what your retirement provisions could offer you and how to achieve your goals after giving up work, please contact us.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
Why it's important to revisit your financial plan
Once you've set out a financial plan, you might think all the hard work has been done. But keeping on top of the progress you're making and ensuring it's still suitable is essential for getting the most out of your assets.
When was the last time you revisited your financial plan? It's a task that you might be tempted to put off or believe there's no need to complete. Perhaps you have reviewed your finances, but how in-depth did you go? It should be considered just as important and worthwhile as the initial work you did when setting out a financial plan.
Think back just ten years ago, your lifestyle, priorities, wealth and aspirations have probably changed at least to some degree during that time. As a result, the financial plan you created a decade ago may no longer be what's right for you. Coming back to your financial plan is a key way of making sure you're still on track financially.
Why review your financial plan?
1. Reflect personal changes: As we've mentioned above, your own situation can change significantly. Perhaps you've celebrated a pay rise over the last few months, welcomed a new family member or have invested in a second home. These can have an impact on your finances now as well as the best way to save and invest. A regular, full financial review gives you a chance to build these life events into your plan. Even seemingly small changes in your personal life may mean there's a better route for reaching your goals.
2. Review your goals: This one links with personal changes. Whilst your life may be similar to last year in terms of work and family, you may find that your aspirations have changed significantly. Perhaps you've decided you'd like to retire from work in a few years, which may mean you should start increasing pension contributions or reducing investment risk, for example. Taking some time to think about what you want to achieve in life and the role money will play in helping you reach goals can ensure your financial plan is aligned to you.
3. Keep track of progress: Even if your goals remain the same, you should take steps to measure your progress. From saving to purchase your first home to making retirement plans. Despite efforts, even the best-laid plans can face bumps along the way, some of which may be outside of your control. Reviewing how you're progressing is crucial for ensuring reality and expectations are in line.
4. Highlight potential risk and opportunities: New opportunities and risk are always emerging. A financial review is a perfect time to take a look at these and respond where necessary. You should also take the time to review your current exposure to risk is still right for you. It's a factor that should be influenced by many different areas, from your goals to capacity for loss, which may also change over time.
5. Take regulatory changes into account: As well as changes to your life, you also need to consider regulatory changes. These can be hard to keep track of, as some will barely be mentioned in the press. From changes to Inheritance Tax thresholds to the Lifetime Allowance for pensions, keeping on top of regulations can be time-consuming. View your financial review as an opportunity to discuss what's changed and how it affects you with your financial adviser.
6. Consider long-term wealth projections: As part of your original financial plan, you may have projected how your wealth will change over the year through cashflow planning tools. This can provide an invaluable insight that you can base financial decisions on. However, the output is only as good as the information the tool has used to reach conclusions. As a result, the core data needs to be updated and reviewed frequently to continue getting the best out of it.
7. Have confidence in your plan: Finances can seem complex and a cause for concern. But you should have confidence in the decisions you make and the direction that you're heading in. Reviewing your finances can give you a greater sense of control and you know you're basing decisions on information that's up to date.
When should you review your financial plan?
With so many reasons for reviewing your financial plan, you may be wondering when and how often you should undertake the task. Ideally, we advise clients to thoroughly review their finances every year. This makes it far easier for you to keep on top of potential changes and ensure that your financial plan suits your current situation. On top of this, it's a good idea to review your finances following big life events too, from buying a home or getting married to celebrating retirement.
If you're ready to look over your financial plan, please contact us.
Weighing up the pros and cons of different Pension Freedom options
Retirees are increasingly concerned about their money running out. With more responsibility placed in the hands of the individual, around how, when and how much income they'll withdraw from their pension, it's no surprise.
Pension Freedoms were introduced in 2015 with the aim of giving retirees more flexibility in how they used their retirement savings. The changes reflect a shift in retirement. In the past, many retirees followed a fairly similar path of giving up work on a set date and then using their pension to purchase an Annuity, providing a guaranteed income for life. However, retirement lifestyles have changed considerably in the last few decades. Pension Freedoms make it easier to match income with the desired lifestyle for retirement.
However, this extra choice comes with more responsibility for retirees. It's led to increasing concerns among those both planning for retirement and those that have already started withdrawing from a pension. Research from Aegon found 38% of financial advisers say running out of money is their clients' primary concern as more retirees opt to access pensions flexibly over purchasing a guaranteed income.
With this in mind, it's important to weigh up both the pros and cons of each option, in relation to your personal retirement goals, before accessing a pension.
What are your options?
When accessing a pension, you've been paying into over your working life, there are three main options.
1. Annuity: First up, is an Annuity. This used to be the most common way to access a Defined Contribution pension. It's a policy that you purchase, which will then deliver a pre-defined income for the rest of your life. The level of income will depend on a range of factors, including your age and health.
There are many different Annuity providers to choose from, so shopping around for the best deal is important. There are also various Annuity products to consider, some, for example, can be linked to inflation to maintain your spending power or will continue to pay out to a named partner on your death.
The key benefit of an Annuity is that the income is guaranteed; you don't have to worry about running out of money in your later years. However, this comes at the cost of inflexibility and you may find that the rate offered isn't as attractive as forecast investment returns.
2. Flexi-Access Drawdown: Since 2015, Flexi-Access Drawdown has also been an option for retirees. Typically, your money will remain invested and you're free to access the funds as and when you choose to.
The essential thing to keep in mind here is that your money is invested. As a result, the value of your savings can rise and fall. Investment returns can help your savings keep up with inflation and hopefully improve your retirement income. However, you also need to consider what you would do if investments performed poorly.
The advantage of using Flexi-Access Drawdown is that you can change the level of income throughout retirement. As more retirees continue to work in some form or plan large one-off expenses, this may be useful to you. You're also in control of your income. Of course, this comes with responsibility and can be viewed as a drawback as well as a benefit. You'll need to ensure you're withdrawing sustainable levels of income; there is a risk of spending too much too soon.
3. Lump sums: Should you choose to, you can withdraw your pension through a lump sum or multiple lump sums. Usually, only the first 25% of each withdrawal is tax-free and this option may not be the most tax-efficient as the remainder will be taxed as income.
However, there are times when a lump sum may suit your lifestyle goals. For instance, taking a lump sum could mean paying off your mortgage, funding a once in a lifetime trip or completing a home renovation project. It's an option that can help make your retirement dreams a reality. As well as the tax implications you should carefully consider how you'll create an income, do you have other pensions or assets that you could use? Taking a lump sum without a long-term plan could leave you financially vulnerable in the future.
Remember, you're not obliged to access your pension at any point. Should you choose to, your pension can remain where it is. This can have some benefits if you're concerned about Inheritance Tax, as money held within a pension is considered outside of your estate for this purpose.
Deciding which option is right for you
There's not a single solution for creating the perfect retirement income. It will depend on your personal situation, provisions and priorities as you prepare to give up work.
The decisions you make around accessing your pension can affect your income for the rest of your life; some decisions are irreversible. As a result, it's important to consider how your needs and goals may change throughout retirement, as well as how decisions could deplete your wealth. This is an area where financial planning can help. Our goal is to help you find a financial solution that is appropriate for the retirement lifestyle you want to achieve.
Above, we've outlined the three main options open to you when accessing a Defined Contribution pension. However, you don't have to exclusively choose one option, though you can if you prefer. Many retirees use a hybrid approach to create an income that suits them. For instance, you may choose to purchase an Annuity to create a base income that's reliable, accessing the remainder of your pension flexibly as and when it's needed.
If you'd like to work with us to discuss your retirement income options, please get in touch.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
Protecting your money from inappropriate investment products
It's natural to want your hard-earned savings to grow as much as possible. However, as the saying goes 'if something seems too good to be true, it probably is'. When we hear about people losing their life savings, it's often related to scams and fraudsters. However, recent headlines show that getting sucked into inappropriate products can be just as dangerous.
The case of London Capital & Finance
Over the last few weeks, you may have heard of London Capital & Finance; the scandal has been covered in the media all over the country.
The firm was authorised by the Financial Conduct Authority (FCA) and HM Revenue and Customs (HMRC) had granted the bonds it was selling tax-free ISA (Individual Savings Account) status. For most investors looking for somewhere to put their money, this would have signalled that their cash was in safe hands. Yet, this wasn't the case.
More than 11,000 investors put £239 million into the bonds. It's easy to see why people were tempted; London Capital & Finance were offering advertising interest rates of up to 8%. With interest rates still low following the financial crisis, this far surpasses what you can find at banks and building societies. Even when investing in the stock market and being exposed to risk, 8% returns would be considered highly optimistic and unlikely.
So, what went wrong? While the company pulled customers in with talk of bonds, only a very small portion of the money actually went into these investments. A large portion of the remainder went into high-risk investments, such as property developments in the Dominican Republic and oil exploration off the Faroe Islands.
The company collapsed at the beginning of the year, sparking an investigation at the FCA, as well as arrests by the Serious Fraud Office.
What happens now is still to be decided; it's thought that as little as 20% of the money placed with London Capital & Finance will ever be recovered. Investors that have been affected currently can't place a claim with the Financial Services Compensation Scheme (FSCS), though the scheme is working with administrators to identify where claims for compensation may be made.
Some investors stand to lose their life savings after investing through London Capital & Finance in a product that wasn't appropriate for them. It's a costly mistake in terms of losing money, but also the stress it would have caused and the aspirations that now can't be achieved.
Choosing the right investments for you
The case of London Capital & Finance highlights why it's important to carefully check investment offerings before you proceed, even when they appear to be secure. If you're tempted by a lucrative offer but aren't sure it's right for you, these tips can help:
- Ask 'is it too good to be true?': If you're left wondering how a product can offer such high returns and why everybody else isn't snapping it up, it's a sign that you should delve a bit deeper. If it sounds too good to be true, there's probably a catch somewhere. Go through the document and available resources to understand all the ins and outs before you even think about parting with your money.
- Take the time to understand the products: While diversifying is important in investments, so too is understanding where your money is. Financial products can be confusing and complex, however, if you're having a difficult time getting your head around how you'll make money, take a step back.
- Don't rush into any decisions: No important financial decision should be rushed, particularly ones that could affect your future financial security. Take your time to weigh up the pros and cons of an investment before you go ahead. If you feel like you're being pressured into making a decision or there are time-sensitive offers, this should be a red flag.
- Do your research: With so much information available online, there's no excuse for not doing a bit of research before deciding whether to invest. It can help you identify the pros and cons, as well as those signs it's an investment to stay well away from. Of course, one of the challenges with this step is verifying the information you can trust, so be careful here.
- Remember not all products are right for everyone: Whilst someone might be singing the praises of a particular investment, it doesn't mean it's right for you. Your investment decisions should reflect a whole range of factors, such as attitude to risk, capacity for loss, and goals.
- Speak to your financial adviser: Go to your financial adviser with any questions or concerns you may have. They're in a position to offer you advice, based on your wider financial plan, and have the experience to understand when you should pass up an offer.
If you're planning to invest your money, but aren't sure which options are right for you, please contact us.
Please note: The value of investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Pension changes to be aware of for the 2019/20 tax year
As the start of a new tax year begins, it's often a time to consider how your financial plan is shaping up and ensuring it's still relevant for aspirations and goals. You may be thinking about how you'll use your ISA (Individual Savings Account) allowance this year or how to make the most of investable assets. One key area you should be considering is your pension.
As you plan for retirement, there are three important changes to keep in mind when you're saving and building an income.
1. Auto-enrolment minimum contributions increase
The auto-enrolment initiative to encourage more people to save for retirement has been hailed a success; with ten million more people saving into a pension. From April 6 2019, workers making the minimum contribution will see their pension contributions rise. This is the latest in a series that aimed to gradually get employees used to the idea of saving for retirement. There are no further planned rises in the future, but they could be announced at a later date.
In the previous tax year, employees were contributing at least 3% of their pensionable earnings. This has now increased to 5%. The average UK employee is expected to pay an extra £30 each month.
Whilst it does eat into the income received and could place pressure on low earners, there are two benefits to the rise. First, by saving more consistently, workers are putting themselves in a better financial position for retirement. Second, employer contributions have increased too, from 2% to 3%, delivering a welcome boost to pots.
It's also important to note that the Personal Allowance, the portion of income where no tax is paid, has increased to £12,500. This may help to offset some of the income losses for those paying minimum auto-enrolment contributions.
2. Lifetime Allowance increase
The Lifetime Allowance (LTA) is the total amount you can hold in a pension without incurring additional charges when you reach retirement.
The LTA is increasing in line with inflation. This means it's risen from £1.03 million to £1.055 million for 2019/20. However, it's still below the high of £1.8 million in 2011/12. If your pension is approaching the LTA, it's a crucial figure to keep in mind. The additional tax charges placed on your pension can be as high as 55% if you were to make a lump sum withdrawal.
Whilst the LTA can seem high, it's easier to reach than you might think when you consider how long you'll be paying into a pension for. If you're approaching the LTA there may some steps you can take to mitigate the amount of tax you'll pay. If you have a Defined Benefit pension, the value of your pension is typically calculated by multiplying your expected annual income by 20. For a Defined Contribution pension, the total value will be considered when applying the LTA, this includes your contributions, as well as employer contributions, tax relief and investment returns.
3. State Pension increase
For many retirees, the State Pension provides a foundation to build their retirement income on. Thanks to the triple lock, which guarantees annual rises, those already claiming their State Pension will notice an increase.
Each year the State Pension rises by either the previous September's CPI inflation, average earnings growth, or 2.5%, whichever is higher. For 2019/20, this means a 2.6% rise to match wage growth. What this means for you in terms of money will vary slightly depending on when you retired, your National Insurance record and, in some cases, the additional pension benefits built up.
If you've retired since 6 April 2016, you'll be on the single-tier State Pension. Should you have a full National Insurance record of 35 qualifying years, your State Pension will rise from £164.35 to £168.60. Over the course of the year, it means an extra £221 in your pocket, helping to maintain spending power.
For those that retired before 6 April 2016, your new State Pension will depend on which tier you fall into. Those receiving the basic State Pension will see a boost of £3.25 a week, taking the weekly amount received to £129.20. If you benefit from the additional State Pension, the maximum cap has risen from £172.28 per week to £176.41.
If you'd like to discuss your pensions and retirement plans, including how changes in the new tax year may have an impact, please contact us.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
The cost of opting out of a Workplace Pension as minimum contributions rise
Millions of more workers are now saving into a pension thanks to auto-enrolment. The retirement saving initiative saw minimum contributions rise at the start of the 2018/19 tax year. While it may be tempting to opt out in light of this, it could mean you're hundreds of thousands of pounds worse off once you reach retirement.
Whilst you may not be affected by auto-enrolment, it's likely that someone in your life is, perhaps children or grandchildren. The majority of workers are now automatically enrolled in their employer's pension scheme in a bid to improve financial security once they give up work. If you know someone that's thinking about opting out of their Workplace Pension, speaking to them about the potential long-term impact could help.
Why is opting out a concern now?
When auto-enrolment was first announced there were concerns that a high level of employees would decide to opt out. However, these concerns proved unfounded and millions of workers have embraced saving for their future. Even following subsequent minimum contribution rises, opt-out rates have remained relatively stable.
As the new tax year started on 6 April 2019, the last of the currently planned increases came in. Employees now pay 5% of their pensionable earnings into their pension, an increase of 2% when compared to the last year. For the average worker, this means losing around £30 from each pay cheque.
Whilst that sum may seem small, it's come at a time when many workers are facing low wage growth and a rising cost of living. As a result, it's understandable that some may be considering leaving their Workplace Pension when the increased contributions are realised. However, it's a decision that could significantly impact retirement income.
The cost of opting out of a Workplace Pension
Employer contributions: First, when you pay into a Workplace Pension, so does your employer. Should you decide to leave your pension scheme, it's highly likely your employer will also halt contributions. In the new tax year, minimum contribution levels for employers also increased to 3%. It's an effective way to boost your pension savings with 'free money'.
Tax relief: Again, tax relief offers you a boost on your pension savings that could make your retirement far more comfortable. It means that some of the tax you would have paid on your earnings is added to your pension in a bid to encourage you to save more. Assuming you don't exceed the Annual Allowance, tax relief is given at the highest rate income tax you pay. So, if you're a basic rate taxpayer and add £80 to your pension, this will be topped up to £100. Higher and additional rate taxpayers can benefit from 40% and 45% tax relief respectively.
Investment returns: Typically, your pension is invested. This gives it an opportunity to not only keep pace with inflation, but hopefully outpace it too. As you usually save into a pension over a timeframe that spans decades, you should be able to overcome short-term market volatility and ultimately profit. As all returns delivered on investments in a pension are tax-free, it's an effective way to invest with the long term in mind. When you start a Workplace Pension, you'll often have several different investment portfolios to choose from, allowing you to pick the one that most closely aligns with our attitude to risk.
Compound interest: The effect of compound interest links to the above point. As you can't make withdrawals from your pension until you reach at least 55, investment returns are reinvested, going on to generate greater returns. This effect helps your pension to grow quicker, building a larger pension pot for you to enjoy when you decide to retire.
It can be difficult to balance short, medium and long-term financial needs. Often the different areas you need to save for can seem conflicting. This is where creating a financial plan that reflects personal aims, both now and in the future, can help. If this is an area you'd like support in, please contact us.
Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Planning for your golden years: New experiences top priorities
In the past, retirement may have been associated with slowing down and taking it easy. But that's no longer the case. Thousands of retirees are looking forward to giving up work to enjoy an exciting pace of life and gain new experiences. With more freedom and choice than ever before, it's becoming more important to plan carefully for the retirement you want.
When Pension Freedoms were introduced in 2015, those approaching retirement age were given far more flexibility in how they create an income. As the meaning of retirement for each person is different and evolving, this greater flexibility allows more people to achieve their aspirations. Whilst your parents or grandparents may have been focussed on kicking back and spending time with family, these may not be your top priorities.
In fact, research conducted looking at how Pension Freedoms had affected retirement in 2017, suggested that relaxation was often far from the minds of retirees.
A survey from LV= found that half of retirees find the new phase of life exciting, with discovering new skills and travelling further afield at the top of their retirement wish list.
- 64% of those that stopped working in the years following Pension Freedoms, said it opened new opportunities for them
- 55% invested time in hobbies
- 46% took the opportunity to holiday in places they hadn't visited before, with the Caribbean, Australia and cruises proving a popular choice
- 20% devoted time to learning new skills
What does this mean for your income?
Traditionally, expenditure has decreased as you leave the world of work and gradually over time as you settle into retirement. However, with more retirees now looking forward to embracing opportunities further afield, it's a trend that could change.
This will depend entirely on what your plans for retirement are. If you've been envisioning grand plans of travelling to new destinations, keeping your skills up to date or investing in a hobby, you could find your outgoings each year actually increase. If your retirement goals follow this modern approach it means you'll need to take a far more active role in managing your income throughout the length of your retirement.
A big part of this is how you'll access the money saved into pensions and when. Under Pension Freedoms, most people can access their pension from the age of 55 onwards. You're free to choose at which points you'll make a withdrawal. However, this is just the start of the decisions you'll need to make. Would your retirement plans benefit if you:
- Made a lump sum withdrawal
- Access your pension flexibly throughout retirement
- Purchase a guaranteed income using an Annuity
- Or a combination of the above?
There are pros and cons to each option, but the key thing to keep in mind is how they could fund the retirement lifestyle you want.
Setting out your plans
With the above in mind, it's important to set out your plans as you approach the milestone. Whilst these aren't set in stone it's an exercise that can help you understand how your income needs will change over the course of retirement and whether your aspirations match up with the financial provisions you've made.
Without a plan, retirement can offer much but fall short of expectation. Often, retirees discover they're in a better position financially than they thought when all assets are considered. Without taking the time to assess what you want and how to achieve it, some may believe that attainable aspirations are out of reach.
Alternatively, flexibly accessing your pension presents the very real risk of running out of money. Not understanding that there could be a shortfall, could leave you financially vulnerable in later years. Recognising this during the planning phase gives you a chance to adjust plans accordingly or take action to make up the gap.
Planning ahead has other benefits too, for instance:
- Giving you confidence in your retirement finances
- Planning for unexpected events
- Considering the potential cost of care
- Estate planning
Balancing retirement aspirations with your financial provisions can be difficult and there are many questions to answer, from how long your pension will need to last to the most efficient way to access it. Whatever your aspirations, these should be placed at the centre of your retirement plans. If this is an area you'd like support with, please contact us.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
Could Relevant Life Policy be a tax-efficient way to provide you with peace of mind?
It's natural to want to protect your family. Life Insurance can help give you peace of mind that, should the worse happen, they'll be financially secure. But there could be a way that's more tax-efficient to provide security for your loved ones. Relevant Life Insurance is a way for business owners to provide effective cover for themselves and employees, benefitting the company, members and potential beneficiaries in the process.
Before we delve into why a Relevant Life Policy can be an efficient alternative; why is Life Insurance important at all?
In simple terms, Life Insurance is a policy that pays out in the event of your death. It's not something anyone wants to think about. However, it's a policy that can provide your loved ones with increased financial security during what will be a difficult time. The money received from a Life Insurance policy could, for example, be used to pay off the mortgage, pay for a child's education and ensure living costs are taken care of while your family grieves. It can give you peace of mind that should something happen to you, your family will be financially secure.
Life Insurance can also be used to leave an inheritance. By naming your beneficiaries you can ensure that something is left behind to those you care about, paving the way for greater financial security for them.
What is a Relevant Life Policy?
A Relevant Life Policy is very similar to traditional Life Insurance; it will pay out a pre-defined sum on your death to named beneficiaries. However, the key difference is that it's offered through a company as a form of death-in-service benefit. The policy is paid for by the company, but pays out to an employee's or director's beneficiaries on death.
A Relevant Life Policy may be attractive if you're a:
- Company director that wants life cover to protect family or to complement existing Life Insurance policies
- Business owner that wants to offer death-in-service benefits to staff members
All Life Insurance policies come with a cost. This premium will be based on a range of factors, including the level of cover desired, age, health and lifestyle choices, such as whether you smoke cigarettes. While it may seem like an expense that isn't necessary, when you consider the security that Life Insurance offers, it's typically one that's worthwhile.
How can a Relevant Life Policy be used to reduce costs?
When you compare a Relevant Life Policy to a traditional Life Insurance policy, it will provide benefits at a lower cost thanks to being tax-efficient. First, when a company pays the premiums towards a Relevant Life Policy, they're usually considered allowable for deductions and not benefits in kind. This means the premiums can be treated as business expenses and you're able to use them to deduct against Corporation Tax, reducing the amount paid.
For holders of a Relevant Life Policy, no National Insurance or Income Tax is liable on the premiums. Premiums also don't form part of an individual's Annual Allowance for pension savings, this is in contrast to Group Life Schemes which do and can result in a tax bill if the threshold is crossed. For high earners who have a tapered Annual Allowance, this can make a Relevant Life Policy particularly attractive.
The tax-efficient benefits can make a big difference to the amount you pay for the financial security a Relevant Life Policy offers. An example created by Zurich demonstrates why using Relevant Life Policy may be more prudent as a company director. According to the insurer:
Mr A is a shareholding director that pays £200 a month for his life cover from his salary after tax. As a higher rate taxpayer, he pays 40% Income Tax on the higher part of his salary, as well as the extra 2% rate above the upper earnings limit for National Insurance.
Once the pre-tax income needed to fund the £200 life cover policy is considered, as well as employer National Insurance contributions, it's estimated to cost Mr A and his company £317.86. In contrast, using a Relevant Life Policy could reduce this to £162.00, a saving of £155.86 a month.
The above example assumes Mr A pays his premiums from his higher marginal rate of tax, and his salary, National Insurance contributions and Relevant Life Policy premiums are all allowable deductions for Corporation Tax.
For beneficiaries, a Relevant Life Policy has the advantage of being paid tax-free, including usually being exempt from Inheritance Tax. This means you can rest assured that those you want to benefit from a Relevant Life Policy will receive the sum specified should you die.
Additional benefits of a Relevant Life Policy
In addition to costing less, a Relevant Life Policy can also have other benefits:
- Compared to the alternative of a Group Life Scheme, a Relevant Life Policy can provide a lower cost and less complex solution, this is particularly true if you have few or even no employees
- A Relevant Life Policy is an attractive perk for employees that can help attract and retain key members of staff.
- It allows business owners to cover themselves using their business rather than personal income
If you'd like to learn more about Relevant Life Policy and whether it's the right option for you, please contact us.
Why are more retirees using Equity Release?
Some retirees are finding themselves asset rich but cash poor, impacting the lifestyle achieved. It's a trend that's led to an increasing number of people using Equity Release products to unlock wealth currently locked away in property. If you're looking for ways to boost your retirement income, Equity Release could be an option that helps improve your overall lifestyle and financial security.
Equity Release is the term for a range of products that allow you to access the wealth that's currently held in property. Usually, it's only available for those aged over 55 that own their home, you don't always need to be mortgage free. The most common Equity Release product is a Lifetime Mortgage. This can pay out either a lump sum or several smaller payments over time. There are multiple products to choose from if you're interested in Equity Release, often the interest will be rolled up so repayments aren't required, but there are some that allow you to repay interest and/or the capital.
Figures from the Equity Release Council revealed that for every £1 of savings accessed via flexible pension payments, 50p of housing wealth is unlocked. Data shows in 2018, total lending activity through Equity Release grew for the seventh consecutive year, reaching £3.94 billion, following a 29% year-on-year rise. The trend indicates that for some retirees Equity Release is an important part of financial security.
Five reasons Equity Release is rising
There are many reasons why Equity Release has become more popular in recent years, among them are:
1. Property price rises: One of the key factors influencing the popularity of Equity Release is property prices. Over recent decades, property prices have soared. It means that many retirees that have paid off their mortgage are finding their home is worth more than anticipated. The average home in the UK is worth around £226,000. It's a sum that could help you achieve retirement aspirations when coupled with pensions, savings and investments.
2. Flexible lifestyle: Retirees today often desire a lifestyle that is more flexible than previous generations. As a result, having a fixed, regular income throughout retirement may not suit retirement objectives. Equity Release allows homeowners to increase their income at points either through a lump sum or over several small payments. It can be a tool to help you tick off one-off expenses, such as travelling or renovating your home, or increase long-term income.
3. A desire to help younger generations: As younger generations struggle financially, more parents and grandparents are choosing to lend financial support. As life expectancy rises, an inheritance is likely to come too late for many striving to reach significant milestones, such as purchasing their first home. Equity Release is one option for accessing some of the wealth you've built up in property to provide support to loved ones at a time when they need it rather than leaving a home as an inheritance.
4. Increased number of products: There's a growing number of Equity Release products available, leading to a more competitive market and lower interest rates. According to the Equity Release Council, there were just 58 product options available in 2016. This figure has more than doubled in two years, reaching 139. As a result, the products on offer are more likely to appeal to more retirees than previously.
5. Product diversity: It's not just the number of products that have increased, there's a wider range of products types. Just a few years ago, there was little difference between the majority of Equity Release products offered, now there's more choice that can help give you peace of mind. For example, many products now offer a no negative equity guarantee and there is a growing range that allows you to pay back the capital borrowed. Increased diversity naturally means that you're now more likely to find an Equity Release product that suits your goals and concerns.
What is Equity Release being used for?
One of the attractive features of Equity Release is that the money accessed can be used in any way that you want. From supplementing general lifestyle costs through to a once in a lifetime holiday, home renovations or paying for long-term care. It's an option that gives you flexibility.
However, you need to ensure that your plans for the money secured through Equity Release is sustainable, whether you take a single lump sum or want to make multiple withdrawals. There is only a finite amount of capital that can be withdrawn from your home, so it's important to think about how you'll use it to achieve your aspirations before making a decision.
If you're considering Equity Release, it's also important to be aware of the drawbacks and alternative solutions first. It's not an option that's right for everyone, contact us to discuss whether Equity Release could help you.
Auto-enrolment increases, but many still won't be saving enough
Auto-enrolment has been hailed a success in getting workers to save for their retirement. However, as minimum contributions are set to rise, there are concerns more will opt out and figures highlight many still won't be saving enough to support them once they give up work.
While auto-enrolment may not be an issue affecting you, it's likely having an impact on the way your children or grandchildren are saving for retirement.
What is auto-enrolment?
Auto-enrolment means the majority of workers in full-time employment in the UK are automatically enrolled in a Workplace Pension, making at least minimum contributions. The initiative aimed to ensure more employees are actively saving for their retirement. With the number of Final Salary pensions offered to employees falling, the responsibility for saving for retirement has shifted to the individual.
Since launching in 2012, ten million UK workers have been auto-enrolled into a Workplace Pension. As a result, the policy has been considered a success. Minimum contribution levels have already increased once, and are now just weeks away from rising again for the tax year 2019/20. It'll mean those currently paying the minimum levels will see the amount being taken from their salary increase each month. There are some concerns that it may lead to more employees opting out of their pension, putting future financial security at risk.
| Date | Employer minimum contribution | Employee minimum contribution | Total minimum contribution |
| April 6 2018 - April 5 2019 | 2% | 3% | 5% |
| From April 6 2019 | 3% | 5% | 8% |
However, even with minimum contributions increasing, it's projected that millions will still be undersaving. According to NOW: Pensions, around 12 million people relying on a Workplace Pension could find they face a shortfall when they reach retirement age. The figure is equivalent to 38% of the working age population.
While undersaving is an issue that affects those in low paying positions, it's also a concern for many others. The research indicates that 87% (10.4 million) of those identified as undersaving earn more than £25,000 annually. As a result, many graduates and other professionals could be on track for a retirement that's less financially comfortable than thought.
Encouraging loved ones to engage with their pension
If your children or grandchildren are thinking of opting out of their Workplace Pension or relying on the minimum contributions to provide a comfortable lifestyle, encouraging engagement with their savings can help. The sooner workers get to grips with their pension and understand what it means for retirement, the more likely they are to achieve their goals. So, how can you help?
Explain the benefits of increasing contributions: For younger generations paying off a mortgage or rent, increased pension contributions can seem like an expense they can't afford. However, once you look at the benefits, such as increased tax relief and compound investment returns, it can often be viewed as a prudent, long-term investment decision. It may mean they're slightly worse off financially now, but provide much larger gains for the future.
Encourage them to understand projections: When you look at the projected income from a pension it often has little meaning. Just a glance at the value a pension is expected to be worth at retirement doesn't demonstrate the level of income it will provide or how long it could last for. As a result, delving deeper is crucial for understanding if they're on track to meet retirement goals. Realising they could fall short of their desired lifestyle may give workers the push needed to start increasing contributions.
Look at other ways to fund retirement: While pensions are a tax-efficient way to save for retirement, it can be complemented by other savings or investments. If your loved ones are worried about increasing pension contributions as they'll be locked away until they approach retirement age, exploring alternatives may be the answer. Putting money into an ISA (Individual Savings Account) or creating an investment portfolio with a retirement goal could provide more flexibility and reassurance.
Suggest where to seek professional support: Working with a financial adviser can help put decisions related to a pension into perspective, as well as highlighting how to make the most of income and wealth. However, younger generations may believe they don't need professional support yet. Providing them with insights into how and why you use a financial adviser, along with recommendations, can improve their financial security over the short, medium and long term.
To discuss how your pension is on track to provide the retirement you want or to connect us with the next generation of your family planning for their later years, please contact us.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by interest rates at the time you take your benefits. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Workplace Pensions are regulated by The Pension Regulator.