Jess Wooler

Understanding Your Final Salary Income: What Income Will It Provide?

If you have a Final Salary pension, retirement planning can seem more straightforward. However, there are still important decisions that need to be made and it’s crucial that you understand the income it will provide. Whether retirement is just around the corner or some years away, reviewing your pension arrangements can provide confidence.

First, what is a Final Salary pension?

Final Salary pensions, also known as Defined Benefit pensions, are often referred to as ‘gold plated’. This is because your income in retirement is defined, protected and the benefits are typically competitive when compared to the alternative.

With the alternative pension scheme, a Defined Contribution pension, employees and employers make contributions, which benefit from tax relief and is invested. At retirement, pension savers have a lump sum of pension saving that will be dictated by how much they’ve contributed and investment performance. At retirement, they will have to decide how to access the pension and ensure it lasts for the rest of their lives.

In contrast, with a Final Salary pension, the pension scheme takes responsibility for how investments perform, which don’t have an impact on your retirement income. Instead, future pension income is defined from the outset. This is usually linked to how many years you’ve been a member of the scheme and either your final or average salary. At retirement, a Final Salary pension will pay out a regular income for the rest of your life.

Among the benefits of a Final Salary pension are:

• You don’t take responsibility for investments: You don’t need to decide where to place your pension contributions, this is in the hands of the pension scheme trustees. The performance of investments won’t affect your retirement income.
• It provides an income for life: Life expectancy can make planning for retirement challenging, as you don’t know how long pension savings need to last for. With a Final Salary pension, your income is guaranteed for life, taking away this element of uncertainty.
• The income is usually linked to inflation: In addition to a lifelong income, Final Salary pensions are usually linked to inflation. This means your income will rise in line with the cost of living, preserving your spending power in real terms.
• Many Final Salary pensions come with additional benefits: Your Final Salary pension may offer auxiliary benefits that provide peace of mind, such as a pension for your spouse, civil partner or children if something were to happen to you.

As a result, Final Salary pensions can be incredibly valuable for providing certainty and security in retirement.

Calculating your retirement income

The good news is that understanding the income you can expect to receive when you retire is usually straightforward.

How the income delivered from a Final Salary pension is calculated varies between scheme. .However, this will already be defined. If you can’t find the paperwork detailing this, contact your pension scheme. There will typically be three factors used to define your Final Salary income:

• How long you’ve been a member of the scheme
• Your final salary or a career average
• The accrual rate, this is the fraction of your salary that’s multiplied by the years you’ve been a member of the scheme.

Let’s say you earned £60,000 at retirement and it was your final salary that was taken into consideration. You worked at the company for 40 years and the accrual rate was 1/60. Your income in retirement would be £40,000 annually using the below formula.

Years as a member (40) x accrual rate (1/60) x salary (£50,000)

You should receive an annual statement from your pension scheme, which will include providing a value of your pension at retirement.

Creating flexibility with a Final Salary pension

A Final Salary pension can provide you with security throughout retirement. Yet, you may still want a flexible income to meet your retirement goals. This may be because you plan to spend more in early retirement or at other points. For example, you may have mortgage debt remaining, plan to travel or want to financially support loved ones.

There are ways that you can achieve the best of both worlds.

Many Final Salary pension schemes will allow you to take a one-off lump sum from your pension to kick-start retirement. This will reduce your income during retirement but does provide the capital for flexibility if needed.

Other options include using a Defined Contribution pension to fund a one-off expense if you have one and using your other assets, such as investments, to create a flexible income. It can be difficult to understand how your different assets fit together to help you reach retirement goals. This is an area we can help you with.

Transferring out of a Final Salary pension

If you have a Final Salary pension, you may be considering transferring out.

At retirement, you do have the option to give up the benefits of a Final Salary pension and receive a lump sum instead, which must be transferred to a Defined Contribution pension. There may be some benefits to doing this, such as providing greater income flexibility, but for most people transferring out isn’t the most appropriate option for them.

Receiving a lump sum can seem attractive. However, what you’re giving up, a guaranteed income for life is often more valuable. It’s important to weigh up your financial security and retirement goals before making a decision. If your Final Salary pension is worth more than £30,000, you must take regulated financial advice first.

Please contact us to discuss your Final Salary pension and what it means for your retirement lifestyle. Usually, there are ways to create a flexible income stream that will suit your goals whilst retaining the security one offers.

Please note: Transferring out of a Defined Benefit pension is not in the interest of the majority of people.

by Jess Wooler

The World In A Week - Deciphering The Known Unknowns

Memories of what it was like during the turmoil of the global financial crisis have resurfaced, but even in the height of the tumultuous times of 2008 and 2009, the market did not have such extreme one-day movements as we have just experienced.

Last week we had two of the worst days in history of the FTSE 100 and the fall on Thursday was bigger than anything experienced during the throes of the great recession:

Source: Investment Week, SharePad/AJ Bell

In the wake of the FTSE 100’s second worst day in history, the index is continuing to fall, down over 6% at the time of writing and puncturing the 5,000-price barrier, as airlines and holiday firms feel the impact of travel bans and falling demand for flights.  The accumulated combination of falls has meant the FTSE 100 is more than 30% below its 52-week high and well into what is traditionally called bear market territory.

The fear of recessionary risks that dominated the end of 2018 have returned, and the record breaking 11-year bull market in the US has ended with the S&P 500 dropping as much as 26.7% from its peak in February.  The most obvious question investors are asking themselves is whether we are at the bottom.

Putting last week’s market moves into context is critical.  By comparing against the three previous market corrections, namely 1987, 2000 and 2008, we can gain some perspective during these agitated times.  Using the historical data of the S&P 500, the main index of US stocks, you can see that while the drops are dramatic, the subsequent recoveries do provide a remedy for the long-term investor.

Source: Bloomberg, Standard & Poor’s, J.P. Morgan Asset Management

While we expect continued disruption to economic activity, we do believe a path towards recovery does exist.  Policy makers and markets will continue to act swiftly and decisively to the continually changing situation.  The unpleasant truth is no one truly knows what will happen and that uncertainty is exacerbating the reactions in stock markets.  However, the landscape has changed dramatically since the global financial crisis and previously unthought of solutions are now possible.

In order to avoid a repeat of the great recession, governments need to allow for unlimited fiscal compensation for lost revenues and wages to all businesses and employees affected by quarantines and lockdowns.  Monetary policy is necessary to avoid financial systems collapsing, while fiscal measures, that are designed to support the recovery, should only be deployed once the virus is under control.  We had our first budget from Rishi Sunak promising a record-breaking stimulus package of £30 billion to counteract the effects of the Coronavirus. Fiscal expansion is already being pushed by the Government, looking to invest in the UK economy, particularly infrastructure projects.

Central banks around the globe have acted swiftly and continue to react to an unknown environment.  This morning we have seen the Federal Reserve’s Open Market Committee reduce interest rates to zero, as they realise the effects of the Coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook.

The Federal Reserve expects to maintain interest rates at zero until it is confident that the economy has weathered recent events and is back on track.  What is more interesting was the Committee’s comment that as it continues to monitor the developments and implications around the globe: “…will use its tools and act as appropriate to support the economy.”  This will include significant quantitative easing and increasing its own balance sheet once again.

Liquidity is being pumped into the financial system to ensure any signs of strain are bolstered and more targeted support is already primed.  This would appear to be Jerome Powell’s ‘Mario Draghi’ moment, as the actions of the central bank are saying they will do whatever it takes to support markets during this unprecedented time.

The Fed’s cut was part of a co-ordinated response from the world’s central banks, with the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Canada and the Swiss National Bank all introducing measures to shore up their financial positions.

While the trigger for the market collapse has been unpredictable, it is at least simple.  A market that had not seen a significant downturn in over 11 years, and was arguably over-priced on some measures, met the unknown effects of an alarming and virulent virus.  Whether the remedy will be simple is another of the myriad of known unknowns that we face; what we do know is that every market collapse has been followed by a recovery.

While we wait for the signs that we are close to the bottom, which means needing to see a little more clarity and certainty, such as infection rates slowing or evidence of global containment, we need to remember our long-term goals.   A pragmatic approach of long-term investing will enable investors to hold their nerve during the most turbulent of times.  Rest assured, cognisant of the current market volatility, the investment team continue to execute the processes that have been tested over the past 15 years, to ensure we deliver robust outcomes to all our long-term investors.

by Jess Wooler

The World In A Week - Corona Crash

Global equity markets saw an increase in volatility last week amid mounting fears of a global pandemic. The MSCI ACWI and the S&P 500 saw the most violent swings, both indices were in positive territory midweek but fell by -1.53% and -1.36% respectively in Sterling terms at market close on Friday. The FTSE All-Share finished the week down -1.77%. In the current environment, investors shifted assets into safe havens such as gold and government bonds.

Slowing global growth continues to be the main concern for markets as the spread of the Coronavirus shows no signs of abating. The OECD and the IMF have revised down their growth figures and the Fed have responded by cutting interest rates between FOMC meetings, which is unusual. The ECB and the Bank of Japan believe they are sufficiently equipped to cope with a financial crisis and are in a position to act.

Unsurprisingly, data continues to show signs of weakening; China’s PMI dropped markedly to 40.3, significantly below estimates of 45.7 and the lowest reading since the survey was launched in 2004. PMI readings below 50 indicate contraction, and while data elsewhere remains reasonably stable, we believe that the impact will start to be felt outside of the Asia region in the coming months with contagion spreading to developed markets.

Moving away from global equity markets to US politics; Biden’s popularity surged in ten Super Tuesday states including Texas last week, reinvigorating his bid to become the Democratic Party candidate. Super Tuesday is the name given to the US presidential primary election day in February and March, when the greatest number of US states hold primary elections.

Biden’s victory sparked the usual derogatory rhetoric from Trump, but we expect the election will be a much closer contest if Trump’s opponent is one with more moderate political views, which, if Biden is victorious over Sanders, would certainly be the case. The real campaigning begins in the summer, which may allow the media to put something else in the headlines and ,hopefully, put the Coronavirus to bed.

by Jess Wooler

The World In A Week - Planes, Trains And Automobiles

It was media heaven last week as the headlines screamed about the worst week for investors since the global financial crisis in 2008.  The Coronavirus has encapsulated the fears of investors; like the disease, they fear the spread and fallout in markets will ultimately lead to the next recession.

Policymakers around the world look to grapple with the consequences of transport and supply chain disruptions resulting from efforts to contain the outbreak.  A degree of forbearance is needed for companies who have been affected the most from the global supply chain disruption.  It is important that any policy response needs to be granular and specific, as the previous blunt tool of interest rates cuts will arguably not be sufficient in this instance.

The Federal Reserve is still the world’s most influential central bank and last Friday Jerome Powell issued a statement that has set expectations for resumption of interest rate cuts in the US.  At the beginning of the year, the markets were pricing in just one interest rate cut in the US; this has now increased to three and will probably mean a rare cut during a presidential election.

In situations like this, the best cognitive course of action is to think of the extreme outcomes that may arise.  There are two possible consequences from the Coronavirus outbreak: either it ends up being the pin to burst the economic expansion or it acts as a pump to prime the next wave of stimulus.

We would expect markets to continue to be volatile until the spread of the virus is brought under control and there are tentative signs that this is already happening.  For investors, now is the time to hold your nerve and not be tempted into a knee-jerk reaction of selling your long-term investments in reaction to short-term market mayhem.

by Jess Wooler

The World In A Week - PRITI Scores

Last week the Home Secretary, Priti Patel announced a new points-based immigration system as part of the post-Brexit reform. This will bring an end to the free movement of labour and will come into play from the 1^st January 2021. The new system builds on the Australian immigration model where the objective is to create a high wage, high skill and more productive economy. The new system would require visa applicants to have a job offer from an approved employer at an appropriate skill level and the ability to speak English. Further points are then awarded based on salary and qualifications, ensuring that the UK continues to attract the brightest and the best. The policy is moving away from the reliance upon lower-skilled workers, but this could lead to a shortage of staff in the social care sector where currently foreign workers make up a sixth. The average salary in this sector is £20,536 meaning these workers would not qualify for points under the new system. The policy is the biggest immigration reform in decades as the UK continues to regain control of its borders.

The UK inflation rate rose to a six-month high of 1.8% but is not expected to change the outlook for interest rates when the Monetary Policy Committee next meet on the 26th March. This week also saw the circulation of the new polymer £20 note with almost 2 billion having now been printed. The introduction of the new note will hopefully reduce the number of fraud instances reported with 88% of the forgeries discovered belonging to the £20 note. The new £50 polymer note is expected to be released next year and will feature the face of Alan Turing. The rise of digital finance and the convenience of online payments has reduced the need for cash. In 2018, cash payments formed 28% of total payments in the UK and is set to decrease to 9% by 2028 with the increasing reliance upon debit/credit cards and the rapid uptake of contactless technology. Sweden is the market leader in this space and is expected to become entirely cashless by 2023, the first country to ever do so. The emergence of Swish, an electronic payments service has enabled this fast transition, with only 1% of transactions now being completed by cash.

Elsewhere, the Coronavirus is continuing to cause a slump in global economic activity. The US Purchasing Managers’ Index (PMI) data showed that business activity fell from 53.4 to 49.4 in January, the first time PMI has fallen since 2016. Furthermore, the S&P dropped -0.81% and investors have switched to government bonds. There are now fears that the Coronavirus could become a pandemic and is expected to continue to disrupt the markets in the short term.

by Jess Wooler

What's The Purpose Of Your Retirement?

Having a purpose can improve your wellbeing, it's no different when you reach retirement. What do you hope to achieve as you move into retirement?

Purpose in life gives you a sense of direction and provides meaning. Having a purpose can improve your wellbeing throughout life, and it's no different when you're in retirement. Understanding what your purpose is can make the next chapter of your life more fulfilling.

One of the key elements of financial planning is marrying together your financial means with your goals.

Why is purpose so important at retirement? For many of us, our working life plays a central role in our purpose. The sense of pride you get when working or as you climb the career ladder can mean work becomes a way that we define ourselves. When we meet someone new, one of the first questions we usually ask is; what do you do?

We don't mean how do you fill your free time with hobbies but how you make a living. As a result, our purpose in life and careers are often entwined for decades. When you retire, you can feel like you've lost your sense of purpose whilst you establish new goals and aspirations.

Once you reach retirement, you'll probably have far more free time on your hands than you've ever had before. That means you need to ask yourself; what makes me happy?

Defining your purpose

When we think about retirement, it's often what we'll be getting away from that we focus on. Maybe you're looking forward to avoiding rush hour traffic or tight deadlines. But by focussing on what you're retiring to, you can start to think about your purpose.

There's no one-size-fits-all purpose once you give up work. With more free time, you can start to focus on those areas that may have been put on the back burner because your career took up precious time. For some it could include:

• Spending time on your passion projects
• Devoting more time to family and friends
• Getting more involved in social activities and clubs
• Visiting new destinations
• Improving skills or learning something new
• Donating time or skills to charity
• Starting a business

For many people, their purpose in retirement is likely to be a combination of several different priorities. Clearly outlining what's important to you in retirement can help you create plans and objectives, providing a sense of direction.

When imagining your ideal retirement, it's easy to focus on the big things. Perhaps a once in a lifetime trip springs to mind. But the day-to-day is just as important; how will you fill your mornings, afternoons and evenings? The plans to spend weekends exploring the local area with grandchildren, afternoons honing your skills on the piano or evenings at a class with friends can help give you a sense of purpose.

Retirement is an opportunity to review what you want and your goals for the next stage of your life. After decades working to save for retirement, it's well-deserved.

Funding your purpose

Whilst your purpose and goals should be at the centre of your retirement plans, money will clearly play a role.

As a result, it's important to assess your purpose with your pension and other provisions in mind. Having confidence in your finances means you're free to focus on what's driving you and gives your life meaning. Putting together a financial plan might seem like a dull task but it's one that can make your retirement years more enjoyable and relaxing.

After meeting with us, many people find they're in a better financial position than they thought. It's a step that gives them the confidence to pursue dreams without having to worry about whether they'll run out of money in 20 years' time. For those that find there's a gap in their finances, there are often solutions or compromises that can be made to ensure they still have a meaningful and financially secure retirement.

Please call us to discuss your purpose for retirement and how your finances can help you achieve it.

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.

by Jess Wooler