All or nothing? Three reasons to keep (some of) your pension invested
One in ten people who plan to retire this year expect to withdraw their entire pension savings as one lump sum, according to research by Prudential.
Is that a bad thing?
It could be.
While everybody is free to make their own decisions about their money; withdrawing all your pension, or taking too much, too soon, could land you with a large and unexpected tax bill in the short term, as well as causing financial hardship in the future.
The research shows that 20% of those planning to retire in 2018 may pay unnecessary tax bills, while 10% plan to take their entire pension as a lump sum.
We are concerned that these people may be making mistakes with their pension, which, while not immediately obvious, may cause difficulties in the future.
We believe there are three key reasons why you should keep some or all of your money invested in pensions:
- Avoiding an unnecessary tax bill by taking more than you need: By taking a sustainable income, you minimise your tax liabilities and increase the chances of your pension providing an income for the rest of your life; and potentially that of your spouse. Taking more than you need could trigger an expensive tax bill which will see your money go to the taxman, rather than continuing to provide an income for you and your family.
- Pensions have benefits: By keeping your money invested in a pension, you can continue to benefit from:
- Tax-efficient growthMoney kept in a pension grows tax efficiently. By moving this money into a savings account, you remove the possibility of seeing much growth at all, as well as ensuring that any growth above this limit will mean that you lose some of those returns to the taxman, anyway.
- Death benefitsAny money remaining in your pension when you die can be passed on to your nominated beneficiaries and is usually free from Inheritance Tax. By comparison, money held in savings accounts forms part of your estate, and if the total value of your belongings is above £325,000 (or £650,000 if you are the remaining partner in your marriage and your spouse left everything to you) your beneficiaries will be charged IHT at a rate of 40% on anything over the threshold.
- Continued contributionsAs long as your pension remains active, you can continue making deposits into it. That means, if you choose to continue working on a part-time or consultancy basis while retired, you could continue to boost the value of your pension fund to either pay for care in later life or leave a bigger legacy for your loved ones when you die.
- Avoiding investment mistakes: There are two common investment mistakes made by those taking money out of their pension unnecessarily:
- Withdrawing money to put into a savings account: This has several potential downfalls. First, you could incur a large tax bill if you take out more than the 25% tax-free lump sum. Second, by putting that money into a normal savings account, you almost guarantee that it will lose value in real terms, as interest rates are currently below inflation and that doesn’t seem likely to improve anytime soon.
- Withdrawing money to invest in property: Lots of people believe that property is a sure-fire winner and that all property investments will generate huge returns. In fact, there is no guarantee of that. The only thing you can be sure of when doing this, is that you will trigger a tax bill when withdrawing the money, to then invest in a single asset class; which is also taxable.
What is that money being used for?
Of those who are making big withdrawals from their pension pots within the first year of retirement, 71% are likely to invest in property, put it into a savings account or invest it. The other 29% are looking to spend the cash, with:
- 34% using it to go on holiday
- 25% planning home improvements
- 20% giving financial gifts to children or grandchildren
Of course, there’s nothing wrong with treating yourself and those you love when possible, but, by taking more than the 25% tax-free limit, you put yourself at risk of using more money than planned and leaving yourself short in the long term.
What can you do with your pension fund?
When accessing your pension, you can now use some or all of it to:
- Buy an annual guaranteed income, such as an Annuity
- Create a Flexi-Access drawdown arrangement, which lets you make withdrawals as and when you please
Any money you don’t convert into retirement income this way can either remain invested in your pension, or you can withdraw it and put it into a savings account.
We’d suggest leaving it where it is.
What happens to pension funds which are put into savings accounts?
Taking that money out of investments and putting it into a Cash account will do two things:
- Remove any possibility of growth beyond the bank or building society’s interest rate. This is likely to be below inflation and will mean that your money loses value in real terms
- Make you more likely to incur tax bills if you use the money at a later date.
Retirement planning is a big part of your overall financial plan. It needs to include provisions to support your desired lifestyle when you leave working life behind, as well as containing any strategies you will use to make sure that you can leave some money or assets behind for loved ones.
Therefore, your retirement plan should involve the most useful and productive strategies to meet your aspirations and goals for both you and your family.
For more information, or to begin planning your retirement, please get in touch with us.
How long will your pension last? Five tips to maintaining your retirement income
28% of retirees could see their pension fund run out long before they die, according to the Pensions Policy Institute and Legal & General.
Why?
There are several major factors which affect how long your pension will last in retirement:
- How much you take each year
- How long you will live
- Investment performance and charges
Life expectancy is the trickiest part of this to calculate, as national averages and calculators can only take you so far. Unless you have a working crystal ball, you won’t know what age you will die until it happens, and by that time, it will be far too late to put a plan in place.
There are many factors which can affect your life expectancy, including your lifestyle, your general health and even your gender and location. Therefore, it is important to have a plan in place which will ensure that you can afford the lifestyle you want, for as long as you need to.
How can you do that?
It all comes down to planning, but there are five key things you can do to make sure that your retirement is as comfortable as possible, whether it lasts 10 years, or 40:
1. Only take a sustainable level of income
Understanding how much you need to live on will help you to strike a balance between your withdrawals and the sustainability of your pension. Know how much you will need to take in income, and whether you will access a lump sum for any reason. Talking to a financial planner or adviser will help you to understand how the two work together and what needs to be done to ensure that your finances are sustainable.
2. Understand life expectancy
There’s no sure-fire way to know exactly how long you will live, but it is possible to make an estimate based on national averages. You will need to factor in your lifestyle, occupation and general health. There are many calculators available to help you with this, including this one from Aviva.
Your plan will need to cover all eventualities; providing an income which will support your lifestyle for as long as you are retired. That means having provisions in place to ensure that you can afford any care you may need in later life.
3. Factor in inflation
Over time, inflation can erode the buying power of your retirement income, especially if you buy a level Annuity, which will not increase each year to keep up with the rising cost of living. That means, to create a sustainable income, you will need to position your money so that it has the opportunity to grow or use products which guarantee that your retirement income will keep up with inflation.
4. Consider the cost of care
Many people assume that their living costs will remain largely flat, or gradually decline, throughout retirement. But, that’s not true for everyone. In fact, most retirees are likely to see their general expenses rise toward later life due to the cost of care.
You will need to think about the type of care you want in later life, as the cost will depend on the intensity of your needs. For example, research from UK Care Guide shows that the average weekly cost of care can range from £250 for basic services, such as occasional home care visits, to more than £1,000 per week for some care homes.
You will need to factor these costs into your retirement planning. Therefore, it will be helpful to talk to a financial planner or adviser who can help you to incorporate the possibility of paying for care, into your financial strategy.
5. Decide what happens when you die
If you are planning for your money to last for the rest of your life, it is likely that there will be some left over when you die.
That means that you need to make decisions about what will happen to that leftover money. That’s where a will comes into play.
If you do not yet have a will in place, this is the sign you have been waiting for that it is now time to write one. If you do have a will in place, that’s great, but your job is not done yet. Take this opportunity to review the will you have in place and make any adjustments that may be needed. Especially if you have started your retirement planning, as it may no longer make sense.
Talking to an adviser or planner can help you to make all these decisions and more. Further still, a professional will be able to apply their skills, experience and expertise to the situation to offer suggestions which you may not have come across previously. To discuss your retirement planning in more detail, please get in touch with us.
Interest rates rise above 0.5% for the first time in a decade
The Bank of England (BoE) has increased interest rates above 0.5% for the first time since 2009.
Today, the Monetary Policy Committee (MPC) voted unanimously to push up the base rate by 0.25% to 0.75%.
That’s not a massive increase; savers aren’t going to suddenly start seeing real returns on most of their bank or building society accounts and it won’t cause significant pain to most mortgage holders.
However, coupled with the 0.25% increase in November last year, it is another warning shot that interest rates aren’t going to stay at record lows forever and that those with debt should prepare for further increases.
So, how will today’s rise affect you?
If you are a saver…
You will hopefully see the increase passed on in the form of higher interest rates.
Nevertheless, it’s probably too soon to get over excited. With inflation (as measured by the Consumer Prices Index) currently at 2.3%, you would currently have to tie up your savings for at least five years to get a ‘real’, above-inflation return. However, tying up capital for that amount of time isn’t without risk and is something to think carefully about doing, before making a commitment.
However, we expect savers will welcome any increase in interest rates with a small cheer, even if they aren’t breaking out the bunting just yet!
If you are a borrower…
How you’re affected by a base rate rise will depend on how you are borrowing money.
If you have a tracker mortgage, where the interest rate is pegged to the BoE base rate you can expect your monthly mortgage payment to rise almost immediately. The same is almost certainly true if your mortgage is arranged on your lender’s Standard Variable Rate (SVR). If you have a fixed-rate mortgage, you won’t see any immediate change to your monthly payments, because as the name implies, your interest rate is fixed and won’t change for the duration of the product you selected when you took the mortgage out. However, the pain may only be delayed until your fixed rate ends, at which point your payments may rise due to the increase in interest rates which occurred during the period of your fixed rate.
Whether you are immediately affected or won’t be until the end of your fixed rate, all mortgage borrowers should start to prepare for further interest rate rises.
There are three key things to do here:
Check your mortgage deal: Use comparison tools or ask your financial adviser or planner to help you to work out whether you are currently receiving the most competitive rates available on the market. This may mean considering a fixed rate, which will protect you from further interest rate rises for a period.
Review your household expenditure: This will help you to understand whether there are any items you can cut back on to create surplus income which could be allocated to higher mortgage payments should rates rise again. Then, you can begin to benefit from making those cutbacks straight away, potentially using the extra income for your emergency fund.
Build and maintain your emergency fund: If you don’t already have one in place, now is the time to take steps to build up an emergency fund. This could help you to recover as and when further interest rate rises take effect, or, as the name suggests, bail you out in a financial emergency.
Should we expect further rate rises?
The BoE Governor, Mark Carney, signalled that three further rate rises will be needed to avoid the rate of inflation remaining above 2% over the next three years.
The report released following the announcement clarifies this: "The Committee also judges that, were the economy to continue to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2 per cent target at a conventional horizon.
"Any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent."
Beaufort App re launch
Beaufort Financial has re launched its app on the ‘MyIFA’ platform. Download on your Apple or Android device to stay up to date and access handy tools to take control of your finances using the password ‘beaufort’.
Tools include a range of calculators such as income and inheritance tax, mileage trackers and receipt managers as well as many more. Learn more about Beaufort Group’s business, news and services and keep up to date by enabling helpful notifications.
The app is the best way to find solutions to everyday financial matters whilst keeping engaged with Beaufort – download it today!
Please note, our previous app will soon no longer be supported – to ensure you don’t miss out you must download the new app – simply search for ‘MyIFA’ in your app store and enter BEAUFORT when prompted.
The effects of inflation – and how to combat the latest rise
November 2017 saw inflation hit 3.1%; the highest it has been since 2012, as reported through the Consumer Price Index (CPI).
As 2018 gets underway, thousands of households will be feeling the squeeze and looking for ways to combat the shrinking value of their income or capital.
What is inflation?
According to the Office of National Statistics (ONS), inflation is “The rate at which the cost of goods and services rises year on year.”
Over time, goods and services increase in price, if income and capital fails to grow at the same rate, household budgets can feel tighter as a result.
Inflation cannot be avoided, it is a necessary factor in any successful economy. The resulting increase in demand for products and services drives production and manufacturing, which ensures that there are enough jobs and that people can afford to live.
As individuals, we can’t impact the rate of inflation. However, it is necessary to monitor the rate at which it is increasing, as this is what will affect our living standards.
The Consumer Price Index (CPI) measures and reports the rate of inflation. It does so through fluctuations in the price of everyday products. It does not show the effects on individual markets, but it does offer a great overview of the cost of living for an average person or household.
Consider everything you buy throughout the year; from food staples, to clothing, holidays and hobbies. The CPI works by comparing the total cost of the products and services year-on-year.
The effects of inflation
As inflation rises:
- The cost of living increases
- Interest rates could potentially rise
- Capital is de-valued; and so is your income
- It becomes more difficult to make big purchases
- The value of your savings is eroded
When inflation rates are high, almost everyone is affected in some way. However, different groups see different outcomes, for example:
- Savers: If the interest rate is lower than the rate of inflation, the real value of savings will decrease. Therefore, savers, who are more risk averse by definition, could very well experience the one thing they are trying to avoid; a loss of capital value.
- Annuity holders: An Annuity provides a guaranteed income for the rest of your life, and potentially, your spouse or partner’s. When bought, the consumer is able to choose between a level or Index-linked product. Level Annuities are the most commonly purchased. As the cost of living rises, a pensioner receiving a flat pension income may find it harder to meet their financial needs over time.
- Employees: If your pay rises are not in line with inflation, the buying power of your income is diminished. This, combined with the rise in interest rates, designed to offset the effects of inflation, can put a squeeze on household budgets.
Offsetting the effects
Combatting the effects of inflation is an ongoing battle. However, with careful planning and by staying informed, you can remain financially stable. Nine things you can do to help yourself are:
- Shopping around for the best savings account: putting in the effort now could save you a lot in the long term, as well as helping you to maintain the value of your capital.
- Hold savings tax efficiently: utilising products which allow you to collect the returns tax free, will mean that you see more of your returns than if you had to pass some of the interest on to the taxman. Cash ISAs are the best example of these. Use your Personal Savings Allowance (Up to £1,000 of interest tax free for basic-rate taxpayers and £500 for higher rate).
- Consider investing rather than saving: Over a longer term, investing has the potential to produce higher returns than saving. Of course, this comes with a risk to your capital and the value can fluctuate over time. However, currently saving accounts are almost guaranteed a real-term loss of value for your money. So, now might be the time to consider becoming an investor.
- Retiring: Fewer people are buying an Annuity when they retire, due to Pension Freedoms. However, if you do decide to purchase an Annuity, think long and hard about the effects of inflation.
- Budgeting: While inflation may not be having an immediate effect on your budget, if the gap between price rises continues for a long period, you will notice it. Therefore, preparing now will pay off in the long term. The price of living may be going up, but the best way to stay financially secure is to plan your finances in advance.
- Increase your income: Put yourself in as good a position as possible for pay rises, bonuses and other financial incentives which may be available from work.
- Build a safety net: Most experts advise having an emergency fund which could cover three months to one year’s living expenses. Having this in place gives you an added layer of financial security which will be extremely useful in the event of an emergency, illness or unexpected rise in the cost of living.
- Mortgage: Mortgage rates should be monitored constantly to ensure that you have the most competitive rate available. Interest rate rises are common when inflation is high, and that means a rise in monthly payments for tracker and variable rate products. Make sure that you can afford repayments if interest rates rise and your budget is squeezed further.
- Seeking advice: An Independent Financial Adviser will help you to make the most of your income. By getting to know you and your circumstances, they can point you toward the best products, methods, and budgets for you and your family.
For more information about inflation, or to discuss ways to protect your finances, contact us.
Seven changes you need to know about in 2018
As we head into 2018, with a new financial year a few months away, the government is preparing to introduce several changes. These will come into effect in April, and it is likely that you will be affected by at least one of them. Being prepared is the key to making the most of the changes and deadlines that are approaching.
To ensure that you are informed about the upcoming changes to allowances, savings and pensions, here are the seven biggest things you need to know about.
- Higher Lifetime Allowance
As inflation hit 3% in the second half of 2017, Philip Hammond announced in the Autumn Budget that the Lifetime Allowance would rise accordingly, from £1 million to £1.03 million.
The Lifetime Allowance dictates how much you can hold in your pension before tax charges are potentially applied. For example;
- 25% lifetime allowance charge applies to funds in excess of the Lifetime Allowance if they are placed in drawdown or used for annuity purchase
- 55% Lifetime Allowance charge applies to excess funds if they are withdrawn as lump sums
- Increased Personal Allowance
The Personal Allowance is the income you can receive each year before starting to pay Income Tax. It’s currently £11,500 but will be increasing to £11,850 in April. That means that, during the financial year 2018/19, you can benefit from an extra £350 tax-free income.
The government has previously announced that they are aiming to raise personal allowance to £12,500 by 2020.
- Dividend Allowance decrease
Although the change was announced in early 2017, the dividend tax-free allowance will fall from £5,000 to £2,000 at the beginning of the next tax year. This means that business owners and contractors who work for a limited company structure will pay tax on annual dividends of more than £2,000.
- Auto-enrolment contributions increase
Automatic enrolment for all eligible employees into workplace pensions reaches its final stages for existing employers this year. In addition, the minimum contributions made by both employees and employers will rise.
Currently, both parties are required to contribute 1% of qualified earnings. However, from April, this will increase to a minimum of 2% from the employer and 3% from the employee. And will rise once again in April 2019 to 3% for employers and 8% in total.
- Help to Buy ISA / Lifetime ISA transfer deadline
Any deposits made into a Help to Buy ISA before April 2017 can be transferred into a Lifetime ISA (LISA), without impacting the annual Lifetime ISA allowance until 5th April 2018. This could give you a double bonus. You can put twice as much into your LISA this year, and still receive the 25% bonus when you buy a house or retire.
- Basic State Pension increase
Each year, the Basic State Pension increases in line with whichever is higher out of:
- The rate of Inflation
- Average Earnings growth
- 5%
This is known as the triple lock system.
In October 2017, inflation reached 3% and set the bar for the State Pension’s 2018 rise.
If you already receive a State Pension, this is good news. Those people entitled to a full basic State Pension will now receive an extra £4.80 per week.
- Higher Income Tax rates in Scotland.
In the 2017/18 tax year, Scottish Income Tax rates for earned income are:
- Up to £11,500: Tax-free Personal Allowance
- £11,501 to £43,000: 20%
- £43,001 to £150,000: 40%
- over £150,000: 45%
However, from April 2018, proposals have been made to change them to:
- Up to £11,850: Tax-free Personal Allowance
- £11,850-£13,850: 19%
- £13,850-£24,000: 20%
- £24,000-£44,273: 21%
- £44,273-£150,000: 41%
- Above £150,000: 46%
This is quite a difference which will affect Scottish taxpayers at all income levels.
Making the most of the 2018/19 financial year
A lot of changes are happening at the beginning of the new financial year. So, make sure that you are informed and able to maintain your financial security when they come into effect. The three main ways to stay on top of your finances are:
- Staying informed
- Knowing how the changes affect you
- Seeking advice
For more information about how the new financial year could affect you, contact us.
2018: A big year for auto-enrolment
2018 marks 10 years since auto-enrolment was first debated in 2008. As the new financial year approaches, we look at what April 2018 has in store for workplace pensions.
What is auto-enrolment?
Introduced into law in 2011, auto-enrolment will be in its final roll-out phase this year. This means that, from April, eligible employees from all sizes of business should be included in a workplace pension (unless they have chosen to opt out).
Eligible workers are those who:
- Are aged between 22 and the current State Pension Age (which you can check here)
- Meet or exceed the earnings limit. This is currently £10,000 or more each year/£833 per month/£192 per week, but this is reviewed yearly and may to change
- Have a contract of employment (i.e. subcontractors and non-contracted partners will not count)
Employees who do not fit these criteria can ask to join the workplace pension on an individual basis.
The end of the five-year phase-in period
Since auto-enrolment came into effect, nine million people have been enrolled; one million of whom joined during 2017. (Source: Department for Work and Pensions (DWP)) During the first few months of 2018, small businesses will be joining the ranks as part of the final stage of auto-enrolment’s introduction.
February 1st is the final phase-in deadline. After which, all employers will be under immediate duty to enrol new staff members who are eligible.
Contribution changes
Perhaps the biggest change we’ll see, is the change to the minimum contribution levels. Currently they are:
- 1% employer contribution
- 2% total contribution (meaning at least 1% employee contributions if the employer pays 1%)
From April, the minimum contribution levels will rise to:
- 2% employer contribution
- 5% total contribution (meaning at least 3% staff contribution if the employer pays 2%)
12 months later, in April 2019, these minimum contributions will increase once again to:
- 3% employer contribution
- 8% total contribution (meaning at least 5% employee contribution if the employer pays 3%)
Many companies and experts have expressed concern that raising the minimum contribution amounts will encourage employees to opt out of their workplace pension.
Currently 10% of people opt out, but experts have warned that the number could rise to 21.7% in 2018 and 27.5% in 2019 (source: Your Money).
However, it appears that those worries may be unfounded, as just 4% of people have made up their mind to leave their workplace pension when the increase comes into effect. Fortunately, half of employees are committed to their scheme:
- 50% will definitely stay in their workplace pension
- 34% are unsure what path they will take
- 12% will consider leaving their scheme
- 4% will definitely opt out
(Source: Aviva)
What’s almost certain, though, is that those who opt out will face a financially difficult retirement.
Other potential changes
In late 2017, the Government indicated that they would extend auto-enrolment to those aged 18 and over. However, this won’t happen until the mid-2020s. Currently, employees who are under the age of 22 must request to join their employer’s workplace pension. While those under the age of 18 will not usually be eligible for employer contributions to their scheme.
It is estimated that lowering the minimum age threshold will mean that 900,000 more people will be automatically enrolled into a workplace pension.
If you are a business owner, employer or employee, to discuss how the pension changes might affect you, feel free to get in touch.
Pension Freedoms: Ignorance isn’t bliss
“Real knowledge is to know the extent of one’s ignorance.”
Attributed to Chinese philosopher Confucius, this timeless phrase has never been more apt than when applied to the topic of Pension Freedoms.
A new report, from Old Mutual Wealth has revealed that many 50-60-year olds are uninformed about Pension Freedoms, with:
- 45% not knowing about Pension Freedoms at all, or not knowing how the new rules affect them
- 37% not knowing how or when they should access Pension Freedoms
Why is knowledge important?
Pension Freedoms are perhaps the biggest revolution to take place in the retirement arena in the past 20 years. Used well, the reform means that you can retire early, in a way which is more flexible and suits your lifestyle.
That freedom has given many people more control over their finances. It means that you can take lump sums from your pension pot for big purchases, or to help loved ones financially, as well as planning ahead to leave larger legacies to your loved ones.
However, the new-found freedoms come with potential dangers and pitfalls. For example, withdrawing too much, too soon could leave you facing financial difficulties later in life.
Current concerns
Research from AJ Bell has shown that some pensioners may run out of money within 12 years, due to three factors:
- Withdrawing too much each year
- Underestimating how long they will live
- Spending money frivolously
44% of over-50s choose to withdraw over 10%, a figure usually considered to be unsustainable, of their pension savings annually. Worryingly, the biggest group of people doing so (57%) are aged 55 to 59. As well as over-withdrawing, more people are taking money without planning for the future, as:
- 47% take ad-hoc lump sums
- 35% rely on an income of regular withdrawals
In addition, the same age group (55-59) severely underestimate how long their pension will need to last, with:
- 51% estimating that their pension will need to last for 20 years or less
- 24% believing that they will need to make their pension last for less than 10 years
The combination of large withdrawals and a lack of planning for the future means that many people are at risk of running out of money part way through their retirement. According to the Office for National Statistics (ONS), the life expectancy for someone who is currently 55 is:
- 81 for men
- 85 for women
That means that pensions may need to last for more than 25 years for both sexes.
Another concern is the reasons behind the withdrawals. Whilst Pension Freedoms means that you can access the whole pension fund for any reason; it doesn’t necessarily mean that you should.
AJ Bell’s research shows that 40% of 55-59-year olds make withdrawals for day-to-day living costs (a pension’s intended purpose). Meanwhile, a quarter (25%) have used Pension Freedoms to make luxury purchases, including holidays and cars.
Using your pension wisely
Pension Freedoms are in place to give you more control over the way you use your pension savings. However, it has never been more important to plan ahead and make sure that you are using them in a way which benefits you both now and in the future.
It might be tempting to withdraw large amounts and go on a spending spree; but that could potentially leave you exposed to financial danger for the rest of your life.
So, how can you use the Pension Freedoms reform to meet your needs?
There are four key points to remember:
- Have an open mind: Old Mutual’s research revealed concerns that consumers may be choosing the "path of least resistance" by accepting the drawdown option offered by their pension provider without shopping around. It can be all too easy to stick to what you know and reject any new options out of comfort. But a little research could go a long way toward making the most of your pension savings.
- Avoid the threats: Unfortunately, the new rules have inspired a range of new scams and fraud attempts. Stay vigilant and never accept an unsolicited offer. Always verify companies through the Financial Conduct Authority (FCA). Secondly, remember that your pension pot may have to last for 20, 30 or 40 years. Spending too much, too soon could cause you financial difficulty in the future.
- Take advantage of the opportunities: taking advantage of pension freedoms could help you retire early, or more flexibly, in a way which suits your preferred lifestyle. It can also help you leave a legacy to younger generations.
- Seek advice: Research from Unbiased has shown that people who take financial advice save an average of £98 more each month, which leads to an additional £3,654 in annual retirement income.
For more information on Pension Freedoms and how your retirement could be affected, feel free to contact us.
Families to pay an extra £900m Inheritance Tax by 2022
The Office for Budget Responsibility (OBR) has revealed figures which show that the estimated Inheritance Tax (IHT) payable on estates over the next five years is due to rise by almost £1 billion; from £32.4 billion to £33.3 billion.
This rise is due, in part, to a larger population; more people are dying, therefore more IHT is being paid.
However, other research shows that an improved understanding of IHT regulations could result in many people paying less IHT. Currently, the figures show that, due to a lack of knowledge, IHT is being taken from estates which could have otherwise been avoided.
More information needed
A worrying number of people do not know how the assets that they leave behind will be affected by IHT, according to research from WAY Investments. In fact, almost half (48%) described their understanding of IHT as ‘not very good’ or ‘terrible’. Meanwhile:
- 25% did not know whether their assets would incur IHT when they die
- 48% did not know that IHT can be as high as 40%
- 22% did not know that ISAs can be subject to IHT
As well as lacking information and understanding surrounding IHT, many people showed that they are very disorganised where their assets and estate are concerned. When asked if they had made and updated their will:
- 35% admitted that they do not have a will
- 47% of people who do have a will, have not updated it within the past five years
What difference does it make?
The advantages of knowing how IHT will affect your assets should be obvious. If you know how your estate will be taxed, it is easier to make tax-efficient arrangements. That way, you can leave more for your loved ones and lose less to the taxman in IHT.
Similarly, ensuring that you have a will and keep it updated and valid ensures that your estate is distributed according to your wishes. Without a valid will, your assets will be distributed according to complex intestacy laws, which will lead to two things:
- Your assets will not necessarily be given to the people you would choose to benefit from them
- Your assets may be divided in a way which is not the most tax-efficient. This will mean that your loved ones will lose more than is necessary in tax and will benefit less from the savings and property that you leave behind
Avoiding unnecessary IHT
Making sure that you have IHT-efficient plans in place for your estate is better done sooner rather than later. Unfortunately, none of us has a crystal ball, and whilst we would all like to believe that we will live forever, we do not know what is around the corner.
Seeking professional financial advice is the first step toward mitigating as much IHT as possible. We can help you to explore the ways in which IHT will affect you, and find solutions which ensure that your loved ones see the benefits of your legacy.
For more information, please take a look at our free resources on our ‘Focus On’ page of this website. Alternatively, feel free to get in touch.
Please note:
The Financial Conduct Authority (FCA) does not regulate Tax Planning and Estate Planning.
Putting off taking financial advice could be a costly mistake
Have you ever talked yourself out of seeking professional financial advice?
You are not alone, almost half (49%) of over-50s who are not yet retired have done the same thing. But, with research by Dunstan Thomas showing that those who take financial advice could enjoy £13,000 more each year in retirement than those who don’t, it is worth challenging that decision.
Why do people avoid taking professional financial advice?
According to research from Retirement Advantage, cost and trust are the top factors deterring over-50’s from seeking professional advice. In a study of people who had yet to retire:
- 42% said that the cost of financial advice put them off
- 31% do not feel that they can trust financial advisers
- 31% do not think that taking financial advice is necessary
- 18% do not think that financial advice will benefit them
- 15% said that they can get the advice they need directly from their pension adviser
Where else do people turn for advice?
Rather than seeking advice from a professional, respondents said that they have, or will, get their information from:
- The internet (44%)
- The Government’s Pension Wise guidance service (42%)
- Their pension provider (35%)
- Their employer (18%)
There is a range of great information available on the internet for those who want to understand their finances and options better. However, this information is very generalised and will not be tailored to your own needs and circumstances. The same is true for the Pension Wise guidance service, they are in place to give you the facts, not recommendations.
Consulting your pension provider may seem like a logical decision, but bear in mind that they are a business. As a business, their main aim is to retain you as a customer and ensure that you keep your money in a place where they can benefit from it. That means that they are unable to make recommendations of more suitable products from other providers, as they are restricted to their own range.
Unless they work as a financial adviser or planner, your employer is not qualified to give financial advice.
Is financial advice worth the cost?
In short, yes.
When compared to other sources of financial information, independent financial advice is priceless. Whilst guidance and facts are available in abundance, both online and through guidance services, it does not compete. Financial advisers and planners work to get to know your situation, then suggest strategies, services and products which work both with you and for you, to help you to reach your financial goals.
The advantages of taking independent financial advice include:
- Unbiased information: The advice you receive from an adviser will not be designed to sway you toward a particular provider or products
- Ongoing education: Financial advisers work hard to keep their knowledge up to date. That means that any information they give to you is guaranteed to be correct, whether financial, legal or product-based
- Experience: Your financial adviser will be able to make applications, handle paperwork and communicate with other professionals in a very efficient way. It is common for those who choose to undergo complex financial processes alone to get confused or take longer than those with help
- Protection: As financial advisers are regulated by the Financial Conduct Authority (FCA), you get peace of mind, knowing that you are supported in the event of unexpected issues
It is vital to ensure that you do not view the value of financial advice on the cost alone. Consider the value of an ongoing relationship with a professional who is available to help you to make complex, and sometimes, life-changing decisions when you need them.
If that is not convincing enough, Unbiased.co.uk has found that people who take financial advice boost their assets by £41,099, on average.
For more information and to find out how we can help you, please get in touch.