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.
Should you take action if your investments underperform?
Investment markets in 2018 saw the return of volatility. A range of factors, from Brexit to US trade policy influenced how well stocks and shares performed. For some people, it means investments may not have delivered the return expected. A glance at returns that are below projections can naturally lead to the feeling that something must be done, but is it the best course of action?
Investment in stocks and shares will always come with some degree of risk and should be considered a way to build wealth over the long term, rather than a quick fix. However, even with this in mind, when you see the value of investments fall a knee-jerk reaction can be common. While you hopefully invested with a long-term plan and goals in mind, a fall in value can cause concerns that you’ve gone off track, or your financial security is threatened.
But, often the best course of action to take is to do nothing at all.
When analysing historical data, it shows investment values typically bounce back, and go on to deliver returns. The 2008 financial crisis is a recent example. While those investing in 2007 are likely to have seen the value of their stocks and shares plummet over the course of 12 months due to the financial crisis, since then many funds and investment portfolios have gone on to recover their losses and generate positive returns.
The FTSE 100, which tracks the value of the 100 largest companies listed on the London Stock Exchange, tumbled 12.5% in 2018, the biggest annual decline since 2008. It wiped off more than £240 billion of shareholder value. It can be unnerving to see values fall, but a key thing to keep in mind is that losses are only set in stone when you sell.
So, while investment values may have tumbled in 2018, it doesn’t necessarily mean you need to change what you’re doing in 2019.
Steps to take if your investments have underperformed
Although investment markets have historically recovered, doing nothing at all as investments lose value can be a difficult mindset to master, even when you know it’s what should be done. Here are five things you can do to ease concerns and keep your investments on track amid volatility.
1. Take another look at your long-term plan: Looking at the bigger picture can put volatility into perspective and demonstrate how long you have for the value of investments to recover. Short-term volatility should be factored into an investment plan, so the impact of recent dips should be minimal when you look at the full timeframe.
2. Speak to your financial adviser: If you have concerns, speaking to a financial adviser can help you understand the impact volatility will have on your overall life goals. It’s an opportunity to bring up particular worries you may have with a professional that understands your aspirations.
3. Consider risk exposure: All investments carry some level of risk. However, if you feel uncomfortable with the level of volatility you’ve experienced in the last 12 months it may be time to reassess where money is being placed. Risk is individual and should consider both your attitude and circumstances, as both of these can change, regular reviews are important.
4. Evaluate portfolio diversity: An investment portfolio should place money in a range of areas, spreading risk and balancing exposure in line with your goals. It’s important to evaluate and rebalance your portfolio where necessary on a regular basis, reflecting your attitude to risk and wider market behaviour.
5. Set review points: It can be tempting to check how investments are performing frequently. However, markets naturally fluctuate on a daily basis and it can give you a skewed outlook of performance. Instead, set out points where you’ll review your investments and financial plans as a whole, for example, every six months, as well as following life events.
Is volatility an investment opportunity?
Falling investment values can present opportunities too. Having seen investment values fall you may be reluctant to put more money into the markets. However, it could deliver greater benefits. Buying stocks and shares when the price is low allows you to take advantage of potential rises in the future.
Of course, it’s important to weigh up the pros and cons of any investment decision before proceeding. You should evaluate a range of different areas, such as attitude towards risk, capacity for loss and portfolio diversity, to identify opportunities that are right for you.
Whether you’re concerned about your portfolio or would like to increase the amount invested, we’re here to offer you guidance and support throughout.
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.
How long could you survive without your income?
If your income were to suddenly stop, how long would you be able to continue your lifestyle, how long would your savings last for?
It’s not something anyone wants to think about, but the truth is, people lose their income every day, ranging from illness, being involved in an accident to facing redundancy. Understanding how you’ll get by should something happen, can put you in a better position financially, and reduce the stress experienced if you’re affected.
We often think ‘it won’t happen to me’. But official figures show that more than a million workers are off work for more than a month, every year. Do you have a capacity to cover a month’s worth of outgoings without it impacting your lifestyle? Research from Royal London found that more than half of workers would worry about their income should they be unable to work for an extended period of time.
Building an emergency fund
One of the best places to start when taking steps to improve your financial security is to start building up an emergency fund, if you haven’t already done so.
It’s recommended to have between three and six-months’ income readily accessible should you experience a financial shock, from an unexpected bill to losing your income. This gives you a financial buffer and peace of mind too; should something happen, you’ll know your bills and other financial responsibilities will be taken care of.
While several months salary can seem like a big step initially, even putting relatively small sums away each month means the safety net will quickly grow.
When searching for a home for the emergency fund, make sure it’s accessible. Of course, an account that will generate as much interest on this sum as possible is attractive, but be sure your money isn’t tied up for a defined period of time before making a decision.
Check your sick pay entitlement
Check your employer’s sick pay policy. These vary significantly and some firms don’t offer sick pay at all. Understanding what you’ll be entitled to if you were unable to work due to illness or injury puts you in a better position to plan and make further deposits to your emergency fund if necessary.
Statutory Sick Pay (SSP) covers most employees, however, some are excluded, and is paid by the government if you’re off work for a minimum of four consecutive days. It will pay out for up to 28 weeks, but at just £92.05 per week, it’s likely many will face a shortfall if relying solely on SSP.
Company sick pay policies are often more generous, paying your average wage or, a portion of it each month for a set period of time. It’s a benefit that can give you peace of mind and security should something happen.
However, not everyone will be entitled to company sick pay. If your employer doesn't, you will need to rely on SSP and your own provisions. Your entitlement should be included in your contract. If you have any questions about the amount of money you'd receive and how long sick pay would be paid for, it's best to speak to your employer directly.
Consider protection products
Finally, protection products can be used to provide further security should something happen. These are policies that will pay out in certain sets of circumstances. Before you start to look at protection products, there are some important things to think about.
First, is the type of protection product you want. This will depend on your circumstances and priorities, in some cases, you may want to take out multiple products or one that covers a range of areas. Critical illness cover, for example, will pay out a lump sum if you, or those covered by the policy, are diagnosed with a medical condition that’s named in the policy. Income protection, on the other hand, will usually pay out an income on a monthly basis if you become too ill to work, after a certain period of time. Some policies will continue to pay for a fixed period, such as a year or two, while others will provide income until a maximum age such as 65 or 75.
Second, you’ll want to ensure the protection dovetails with the sick pay you’ll receive, as there will typically be a deferred period. If, for example, your company will pay your full salary for six months should you fall ill, ideally, you’ll want a protection policy that will have a six-month deferment period. This allows you to reduce the premiums paid as much as possible.
If you’d like to discuss your financial situation and the steps you can take to improve short, medium and long-term security, please contact us.
Why regular financial reviews are critical for achieving aspirations
You’ve set out a financial plan and followed the plan you were advised on. Now, you can kick back and forget about it, right? Wrong. Effective financial planning is about much more than an initial strategy. Regularly going back to your plan and checking in with your financial adviser or planner ensures it remains suited to your needs and aspirations. It should be, at least, on an annual basis.
As with all of life’s plans, things go awry, opportunities can present themselves or you may simply have a change of heart. If you fail to go back to your financial plan you may find years later that it hasn’t suited your goals and priorities for some time.
It’s also the perfect time to reassess your life goals. Often, the bigger picture can get lost in the day-to-day. Frequently coming back to what you want to achieve, and whether you’re on track to meet aspirations should be part of your financial plan.
If you’re still not convinced about the need to revisit your financial plan at regular intervals, we’ve got six reasons you should be doing so.
1. Your aspirations and priorities change
When you look back at what you wanted to achieve a decade ago, it's likely there will be change. Aspirations and priorities to shift over time.
You may have started with an investment portfolio that took a relatively high level of risk in a bid to deliver higher returns. However, after welcoming children, stability may now be a greater priority, for example. Likewise, as you plan for retirement you may have taken a measured approach to spending, putting money away to fund your later years. Now that you’ve reached the milestone, you may want to increase spending to really enjoy your life after giving up work.
Chatting with your financial adviser about what your priorities are now and how they have shifted gives you an opportunity to realign your wealth and assets with this in mind.
2. Your situation can alter
It’s not just attitude and personal goals that can change either. Perhaps you’ve received a pay rise and now have more disposable income to invest. Or maybe you’ve received an inheritance and your current financial plan hasn’t taken this into consideration.
When your personal situation changes, it’s always worth taking a step back and asking if it’s something that should affect how you’re handling your finances. It means you can get the most out of your money, stay on track and maybe even exceed the targets set.
3. Review performance
While constantly watching the performance of your investments isn't a good idea, as they will fluctuate, ensuring you effectively review your plan is crucial. How will you know if you're on the right path otherwise?
Reviews can show if you've gone off course at some points. Taking action early means you can minimise the impact it has on your overall goals. It's also an opportunity to review those areas that have outperformed and could give you a nudge to restructuring assets to follow this.
4. Wider political and economic factors have an impact
Your situation and aspirations are the centre of your financial plan. But some factors outside of your control can impact it too. From legislation altering the way you can access your pension at retirement and tax-efficient allowances changing, to geopolitical tension influencing investment performance.
It’s not possible to predict all events or the impact they’ll have. However, reviews of your financial plan, ensure you can prepare and respond to potential risks and opportunities.
5. Improve your confidence in your finances
If you are worried about your money or financial decision, conversations with your financial planner can help. Finance can seem complex and ever-changing. As a result, you may not be certain about whether a decision is the right one, even if it’s something you’ve covered in a financial plan years ago.
The more you assess your finances and engage with your plan, the more confidence you’ll feel with making decisions. It’s a process that can help give you peace of mind that you’re taking steps towards the financial independence you want.
6. Effective estate planning
While passing away isn't something anyone wants to think about, Inheritance Tax and estate planning is an important part of the financial planning process. As circumstances, views, and wealth change, it's natural that what you want to happen to your estate will change too.
If you’d like our help, whether to create or review a financial plan, please get in touch.
Are your cash savings delivering the best returns?
From a young age, we're told to save for a rainy day to achieve our future goals, be it retiring early, buying a property or travelling. But, while we’re told to save, rarely do we talk about the importance of interest rates as part of growing your savings.
When putting money away, we want it to grow and not just through your own contributions. As the cost of living rises thanks to inflation, the value of money held in an account falls. To maintain spending power, you need interest rates or investment returns that outpace inflation. But, not all accounts do.
In the past, a typical cash account may have allowed you to keep pace with inflation. But a long period of low interest rates means it’s more difficult. Money sat in cash savings accounts are likely to be losing money. So, how can we secure the best returns?
Check your current interest rate: The first step is to understand how your savings are performing. If you don’t know what interest rate you’re currently receiving, plus any other benefits, it’ll be difficult to compare alternatives. A simple check of your bank statement or a browse through your online account is needed. The current Bank of England base interest rate is just 0.75%, and it’s likely your rate isn’t much higher.
Know what you’re saving for: Your saving goals should have a big impact on where and how you save money. If, for example, you’re saving for a goal that’s still five years away, locking your savings in a fixed term savings account can help you access higher interest rates. If, on the other hand, your savings need to be accessible, you may choose to sacrifice higher returns for flexibility. Regular savers can also benefit from making frequent defined contributions to a savings account.
Use your ISA (Individual Savings Account) allowance: Each year you can place up to £20,000 into ISAs. As ISAs are tax-free, they’re a useful tool to keep all of the gains from your saving habit. The useful tax-wrapper can either pay interest or be invested in stocks and shares, depending on the account you choose. There are also Cash ISAs that have competitive fixed interest rates for a defined period on the market.
If you’re saving to buy your first home or for retirement, a Lifetime ISA (LISA) can provide a 25% boost to your contributions. However, to open a LISA you must be aged between 18 and 40. Money deposited also can’t be accessed (without a penalty) before the age of 60 for a purpose other than buying your first home.
Shop around: Much like getting the cheapest deal on utility bills, finding the most efficient home for your savings means shopping around. There are hundreds of accounts to choose from. Comparison websites are the ideal place to look for the top savings accounts and for new deals entering the market. Once you’ve found one, be sure to regularly review it and check other providers to keep on top of your plan.
Remember, if your savings exceed £85,000 you will need to spread the money across several banks or building societies to protect it. Savings above this amount aren’t covered by the Financial Services Compensation Scheme (FSCS).
When is the time right to consider investing?
With interest rates on many saving rates below inflation, you may be looking for alternatives. Investing is one way to potentially outstrip the eroding effect of inflation. However, some people with the means to invest are cautious of doing out of fear of losing money.
But investing could be the best way to generate returns on the money you're putting aside. Historically, investing has outperformed interest earned in savings accounts over the long term, even when market volatility has been experienced.
Once you've built up an emergency fund, and if your savings objective is long term, investing is worth considering. There is a range of risk profiles available to choose from, allowing you to create an investment portfolio that matches your attitude, goals and capacity for loss. Taking the step to invest or build up your investment portfolio can help you get the most out of your savings.
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.
Should you stop pension contributions if you’re approaching the Lifetime Allowance?
If you’ve been saving into a pension during your working life, you might be closer to the Lifetime Allowance than you think. Going over the threshold could mean facing tax charges on future income and, as a result, some are opting to leave their schemes. But is that the best option?
What is the Lifetime Allowance?
Currently set at £1.03 million, the Lifetime Allowance is the total amount you can save into a pension over your life. It can seem far-off, but when you consider we may pay into a pension over four decades, along with employer contributions, tax relief and potential investment returns, the value of your pension can be more than expected.
What happens if you exceed the Lifetime Allowance?
Legally you can exceed the Lifetime Allowance. But this means paying additional tax. If, when you start taking your pension, the value exceeds the Lifetime Allowance, the excess benefits will be subject to:
- 55% tax if the pension is taken as a lump sum
- 25% if withdrawn as an income
With this in mind, it’s easy to see why some are choosing to retire early, reduce hours or opt out of a pension scheme entirely.
It’s a trend that’s particularly evident among high earners and those with Final Salary pension schemes, which typically offer greater benefits than alternatives. It’s a penalty that’s affecting doctors, but it’s also an issue for other earners.
To calculate a Final Salary scheme in your Lifetime Allowance you must multiply the expected annual income by 20. If, on the other hand, you transfer out of the scheme, the Cash Equivalent Transfer value may be quite high and contribute towards a large proportion of your allowance.
Even if you’re approaching the Lifetime Allowance, there are two key reasons to continue paying into your pension:
1. Employer contributions: If you leave your employer’s pension scheme, they will stop paying in too. This could end up costing you money overall. While the tax implications may be less tax-efficient once you breach the Lifetime Allowance, it doesn’t necessarily mean all the benefit is lost. Where your employer is contributing at high levels, it may be the case that this offsets the additional tax you pay, and you still end up with more than you put in.
2. Auxiliary benefits: Before considering leaving your pension scheme, look at the additional benefits on offer. Some pensions offer auxiliary benefits that may be valuable to you; leaving the scheme typically means forfeiting these. One of the most common auxiliary benefits is a pension for your spouse, civil partner or dependents. It provides financial security for your loved ones should you pass away first, it will usually pay out a percentage of your pension or salary.
While avoiding paying unnecessary tax on your savings makes sense, it needs a balanced approach. Weighing up how the decision can impact financial security, as well as your family’s, now and when you reach retirement is important. In some cases, paying more tax could prove beneficial when you look at the bigger picture.
Options if you leave your pension scheme
While it’s not the right option for all, for some leaving a pension scheme may make sense. If you progress this option, it’s crucial to have a plan for the future. There are other tax-efficient ways to save for your future, such as Cash and Stocks and Shares ISAs (Individual Savings Account).
If you’d like to discuss retirement provisions and tax liabilities and their impact on your wealth, please contact us. We can help you understand if leaving your employer’s pension scheme is the right thing to do in your situation.
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.
Brexit and the property market: What does it mean for you?
The Brexit debate is still raging. While predictions are being made about the likely outcome, more uncertainty seems to be the only constant. For those looking to buy a home or move house, what does it all mean?
The official date when Britain is set to leave the European Union is now just weeks away on 29th March 2019.
House prices did fall following the referendum. But despite the doom and gloom predictions prices have remained relatively steady since across the UK as a whole. Prices haven’t increased at a pace seen in the past but, for the most part, homeowners haven’t seen significant drops in value either.
House prices in June 2016, when the referendum occurred, was up 8.17% compared to the previous year. A year later, in June 2017, this had fallen by 4.13% and dipped further in June 2018 to 3.03%. This meant that in 2006 the average UK house price was £212,887. Two years later, it was £228,760. The modest increase was not the catastrophe that some predicted.
However, signalling the lack of confidence in the market, the number of house sales has fallen this year. According to research conducted by Project Etopia, six in ten regions in England and Wales saw sales fall in the first half of 2018. The average decrease in sales was 4.9%.
What will happen to property prices?
There’s no certain answer, not least because we don’t know which direction Brexit will take. Even if we knew, calculating the full impact would be challenging as effects of any deal will depend on many factors.
Mark Carney, Governor of The Bank of England, previously warned that a no-deal Brexit could see house prices tumble. Under the worst-case scenario, prices could fall by a third over a three-year period. For prospective first-time buyer or planning to move, this is daunting, who don’t want to purchase a home only to see the value eroded.
While some prospective buyers and movers are choosing to wait and see, you don’t have to. There are steps you can take to improve your financial security despite a looming Brexit.
1. Consider interest rates
Since the recession, interest rates have remained low. Even following two recent rate rises, the Bank of England base rate sits at 0.75%. Good news for those with a mortgage, as repayments have been low as a result.
As with all things Brexit, opinions are divided. Some believe interest rates will remain some say they will rise following the deal. With this in mind, it may be wise not to stretch budgets too far. Quick calculations can highlight whether you can comfortably afford to pay your mortgage, if interest rates were to rise by 5% and give you peace of mind. With surplus income, it also gives you an opportunity to overpay your mortgage, taking advantage of the current low interest rates.
2. Use a bigger deposit
One of the biggest worries about buying a home before a potential downturn (post Brexit), is the prospective of negative equity, where the value of your home is less than the amount left on your mortgage. It can make it impossible to move and many would have to use savings to do so. Most lenders also won't let people with negative equity switch to a new deal when their current one ends and this can mean paying higher interest rates.
Often, this is more of a concern for first-time buyers, as they’ll own less equity to begin with. Using other savings to boost your deposit where possible can help to reduce the risk of this happening.
3. Regard a home purchase as a long-term investment
Following Brexit, some experts expect house prices to dip. However, looking at the bigger picture, it’s likely that they’ll recover in the long-term. Purchasing a property with the view that’s it’s a home and long-term investment means there’s less worry if the market experiences some short-term volatility. Over a period of five to ten years, it’s probable that any market downturn will correct. If you don’t sell during a low period, you won’t make a loss. That said, if you do sell then the property you purchase may have also reduced in value.
If you’re looking to purchase a home that you only plan to own for short period of time, it may be worthwhile waiting to see what Brexit will bring in the coming months.
If you'd like to discuss your finances in the context of Brexit, please contact us. We'll help you understand how the uncertainty and subsequent deal could affect you and your plans.
How to protect your pension income during volatility
Pensioners are taking advantage of the Pension Freedoms. Introduced in 2015, the changes offered more flexibility in how people can take an income in retirement, but at the same time gave pensioners more responsibilities too.
For retirees that have chosen to leave some, or, all of their pension invested, protecting its value and the income it provides is important. Here, we outline some of the options and considerations.
Flexi-Access Drawdown, as it is called, allows pensioners to leave some or all their pension invested, rather than purchasing an Annuity that provides a guaranteed income. It’s an attractive option for two key reasons:
- Firstly, it allows pensioners to withdraw flexible amounts of money when it suits them. As lifestyles and aspirations change in retirement, this can be beneficial.
- Secondly, as the money remains invested, it has an opportunity to continue growing. With retirement now lasting longer, it’s a useful way to potentially boost pension income.
But how can remaining invested during retirement affect your income, and why might you need to protect it?
As with all investments, there’s a chance it decreases in value. Should you decide to make a withdrawal at a low point, you would need to sell a larger percentage of your pension fund to receive the same level of income. This means that your savings are used more quickly which reduces future growth too. This is known as pound-cost-ravaging.
As a result, it’s recommended that retirees take a lower level of income when their investments are underperforming. However, it’s a step that many fail to take. According to research from Zurich:
- 36% of people keeping their pension invested through retirement do not have a cash safety net to fall back on, meaning they could be hit if markets fall
- Among the 64% that are holding cash in reserve, fewer than one in ten would think to use it if there was a significant drop in the stock market
- 49% of people taking an income in drawdown said they would continue to withdraw the same amount in the event of a market correction; just 12% would scale back withdrawals
Alistair Wilson, Zurich’s Head of Retail Platform Strategy, recently said in the news: “A staggering number of retirees appear to be in the dark over how to protect their pensions if stock markets tumble. Withdrawing the same level of income in a downturn could take a bigger bite out of your pension fund – yet it’s a trap that’s easily avoided.”
What steps can you take to protect your pension?
1. Hold a cash reserve
Holding some of your savings in a cash reserve gives you the means to ride out bumps in the market. If investment values fall, using your cash assets, rather than withdrawing from your pension, can help protect value.
How much you should hold as a reserve depends on your personal circumstances, including living expenses. Many retirees are taking the necessary action but the research suggests a high portion will be reluctant to use their cash even though it could improve value and wealth in the long term.
2. Understand what withdrawal rate is sustainable
Understanding how much you can afford to withdraw from your pension over time is a critical step before you proceed with Flexi-Access Drawdown. When you choose this route, you’re responsible for ensuring that your pension will continue to support you throughout your life.
Again, a sustainable level will depend on your personal circumstances. But an annual withdrawal rate of around 3% can be a benchmark for some. If the value of investments falls, so too will the withdrawal amount.
3. Regularly review investment performance
If your pension does remain invested in retirement, an active role in monitoring its performance is key, as this will impact on your income. While monitoring pension performance, it’s important to remember that short-term market volatility is normal. Don’t panic if you see that your pension has decreased in value but do have a plan in place for when it happens.
4. Take action when needed
Reviews alone aren’t enough. If investment values fall, scaling back the amount you’re withdrawing or even stopping can help preserve the value of your pension in the long term. Having assets you can fall back on is very useful. This is where a cash reserve can provide security should a downturn occur.
If your investments are too volatile, you may benefit from diversifying or reducing the level of investment risk you’re taking.
5. Seek professional advice
Working with a financial planner can help create a tailor-made retirement plan that works for you. Bringing together your aspirations with your pension savings. By working with a professional, you can be confident in the decisions and how potential investment downturns will affect your income.
If you’re using a Flexi-Access Drawdown product or are considering doing so, please contact us. We’ll help you understand how market volatility could affect your income in the short, medium and long term, and the steps to take to safeguard your retirement aspirations.
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. Your pension income could also be affected by the 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.
Three things to know about sustainable investment
Do you plan to grow your investment portfolio this year? Will ethics factor into the decision? More investors are choosing to invest sustainably and ethically but doing so can seem complex. Before you start moving your money there are three key points to consider.
Sustainable investment has grown in popularity. It’s about not only investing your money with companies that think and operate in a sustainable way, as well as thinking about profit.
Different people call the practice by different names. Some we’ve seen include: responsible investing, impact investing and ethical investing. Whilst each have slightly different meanings, when you dig deeper, their collective aim is to invest in a way that seeks to have a positive influence.
As more people become aware, ethical bank Triodos predicts the market will see a significant boost in the next few years. Research shows that more than half of investors want their money to support companies who make a positive contribution to communities, to society and to countries on a global scale. The UK market is expected to grow by 173%, reaching £48 billion, by 2027.
All investment decisions need careful research and planning to ensure they are right for you. When investing with an additional factor in mind, it can add to the work. Here are three areas to think about first.
1. Sustainable investment can cover Environmental, Social and Governance (ESG) concerns
Sustainable, ethical, responsible; they’re broad terms that can mean different things to different investors.
ESG criteria covers numerous different concerns, from the impact fossil fuels have on the environment to executive compensation. Sustainable funds have their own criteria when setting out where they’ll invest your money.
Sustainable investing can be being quite subjective. What you may deem as a sustainable stock, another investor may decide is unethical. Take pharmaceuticals, one person may decide it's unethical due to animal testing, while another will argue it contributes to the development of society.
This can throw up some difficulties. So, you need to think about your top priorities. The Triodos research highlighted the areas that investors are most likely to avoid:
- Manufacturing or selling of arms and weapons (38%)
- Worker/supply chain exploitation (37%)
- Environmental negligence (36%)
- Tobacco (30%)
- Gambling (29%)
With ESG covering different concerns and sustainability being subjective, it can be challenging to know where to invest. The good news is, that as more firms operate in this space and more investors choose to invest in this way, the options are growing.
2. There are different strategies
With sustainable investment priorities, there are different approaches you can use to make sustainability part of your focus and your investment.
- Do you want to actively avoid companies that operate in sectors deemed unethical?
- Or would you prefer to invest in firms that are at the forefront of making sustainable changes?
Much like any investment portfolio, a sustainable investment needs to reflect your objectives. This should combine your aspirations and your financial situation, such as your investment risk tolerance and portfolio size.
When factoring in your personal sustainability goals, there are three main ways:
- The first is known as negative screening. This is where you avoid investing in certain industries or companies because their practices don’t align with your ethical stance.
- In contrast, positive screening would see you investing in companies that are working to improve the concerns you have.
- Finally, engagement is where you use your shareholder power to exact change within companies.
As the latter strategy requires you to hold a significant amount of power, it’s an option that’s more commonly used by institutional investors, rather than individuals.
3. Sustainable investing doesn’t mean lower returns
Even when sustainability is a consideration, the returns you make from your investments are still important. It’s a common belief that investing with other factors in mind leads to lower returns. However, there is research that suggests this isn’t always the case.
Research published by the University of Oxford and Arabesque Asset Management in 2015, concluded that 88% of reviewed companies with robust sustainability practices demonstrate better operational performance. This ultimately translated into improved cashflow, which benefits investors.
Advocates of sustainable investments suggest that these over the long-term, may outperform alternatives as they consider more risk factors. While investment performance can’t be guaranteed, the research indicates that sustainability and profitability aren’t incompatible.
Research also suggests that ethical investing can be just as profitable. But there are some key things to keep in mind. First, all investments come with a level of risk and there is a chance that the value of your investments will decrease.
Second, comparing past performances of funds and stocks doesn’t give you a reliable indicator of how they’ll perform in the future and finally, sustainable investment is still a developing market.
If you'd like to discuss investing, including what sustainable investment means to you and how to incorporate it into your financial plan, 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.
Pension cold calling ban: What does it mean for scams?
The long-awaited ban on pension cold calling came into effect on the 9th January 2019. In a bid to protect pensioners being targeted by fraudsters, the ban has now been approved into law. It’s a move that should help the Financial Conduct Authority (FCA) and other organisations reduce pension fraud.
Previous figures released by the FCA and The Pensions Regulator (TPR) have shown how devastating pension scams can be. On average, victims lost £91,000 in 2017. It’s a significant sum that could have a long-lasting effect on retirement plans, as well as causing stress.
Pensioners and those approaching retirement are often targeted by scammers through unsolicited contact. In fact, Citizens Advice previously suggested 97% of scam cases about pension unlocking services stemmed from cold calls.
To entice pension savers, scammers will offer ‘a free pension review’, to unlock a pension early or suggest investments that are ‘high return, low risk’, such are a red flag. However, a poll found almost a third of those aged 45 to 65 wouldn’t know how to check if they’re speaking to a legitimate pension adviser or provider and 12% would trust an offer of a ‘free pension review’.
Highlighting the scale of the problem, TPR has revealed it’s investigating six people for pension fraud. Estimates show around 370 people in the UK have been persuaded to transfer around £18 million to fraudsters.
An attractive target for criminals
It’s easy to see why criminals are targeting pensions. Pensions can be complex and some savers have been duped into giving away their pension or personal details. On top of this, a pension is often one of the largest sums of money people have saved over their working life, and many don’t regularly check it. As a result, many pension scams go unreported.
The growing levels of fraud and personal losses has led to action and for pension cold calling to be banned. So, what does this mean for you?
Firstly, it offers you more protection. If you get a cold call from someone wanting to talk about your pension, you should hang up. Reputable providers and advisers that you want to work with will not use this form of contact.
But that doesn’t mean you should let your guard down. A ban on cold calling doesn’t mean fraudsters will stop. Giving pension holders the confidence to step back from unsolicited contact is crucial. But it’s not just about cold calls. There are some loopholes criminals will try to exploit. One is to pose as genuine advisers and providers, including:
1. Calling from abroad: The cold calling ban only applies to UK phone numbers. As a result, fraudsters, may call from abroad, allowing them to work around the ban.
Six steps to prevent pension scams
The risk of being targeted by scammers is still very real. These six steps can help you reduce the risk and protect your pension.
1. Understand your pension: The more you understand about your pension, the better you can safeguard it. For instance, scammers may suggest they can help you access your pension before the age of 55. However, this is only possible in very rare circumstances and should be done by contacting your pension provider directly.
2. Don’t make any quick decisions: Pension decisions can affect your income and financial security for the rest of your life. As a result, you should take your time. Reputable professionals will understand this, while criminals will try to pressure you into making a snap decision.
3. Be cautious of all unsolicited contact: While the cold calling ban does offer protection, you may still be targeted by unsolicited contact. Be cautious when responding to any type of communication you’re not expecting.
4. Check the authenticity of who you’re speaking to: The FCA Register offers a simple, effective way to check if you’re speaking to a regulated person or company. Be aware that criminals may use the genuine details of an adviser or firm. To talk to a professional, call directly using the details listed on the register.
5. Ask questions: Scammers rely on you taking them at their word. Asking questions can help you uncover untruths. From investment risk to legislation, genuine providers will be happy to answer your questions, understanding that any pension decision is a big one.
6. Be realistic: The golden rule ‘if it sounds too good to be true, it probably is’, applies to pensions. There’s no simple way to significantly boost your pension savings or access it early. If there were, more people would be doing it.
If you'd like to discuss your pension, whether you think you've been targeted by scammers or not, please get in touch. We're here to help you understand what your pension options are.
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.