Pension opt outs are rising – but foregoing a pension could cost you thousands
Increasing numbers of employees are opting out of their workplace pensions as the cost-of-living crisis bites but experts warn this could leave future retirees out of pocket.
Inflation has already hit a 40-year high of 10.1% and the Bank of England predicts it could go as high as 13%, with some forecasters even warning the figure may hit 18% or higher.
That means increased bills for everything from energy to food, travel, clothes and holidays.
The Bank of England has already begun increasing the cost of borrowing – the base rate – in an attempt to bring inflation down.
That will mean higher interest on loans and mortgages and higher energy costs which could also add to financial pressure on households.
It is no surprise that households are looking to cut back on their expenses in a bid to preserve at least some of their cash.
Many are looking at their pension contributions and wondering if the money can be used immediately rather than for their retirement to help get over rising cost pressures.
Analysis by online pension provider Penfold has found that the number of savers opting out of company pension schemes increased 29% from March to July this year, just as the cost-of-living crunch began to make its effects felt.
While this may save you money and release some spare cash in the short term, the impact could be felt much longer-term and mean a poorer retirement.
Pete Hykin, co-founder at Penfold, comments: “Everyone understands that the pressures facing today’s savers are considerable”.
“Many people are feeling the pinch on their incomes and savings, but it’s vital that those people who are financially able to pay into their pension continue to do so”.
“The increasing number of opt-outs is a worrying trend, especially as the impact of pausing contributions, even for just a short period, can have a hugely detrimental impact on an individual’s finances in retirement, especially for those starting out in their career.”
A 20-year-old stopping a contribution of £200 per month would miss out on £28,000 in their pension pot from stock market performance if this was carried on for a three-year period.
That means less money for your golden years at a time when you may not be working and may not have other sources of income beyond a state pension.
You would end up having to invest more once you restarted contributions if you wanted to catch up.
Although it is especially tough at the moment, it’s essential to maintain contributions and make cost savings elsewhere if possible. Ultimately cutting off your long-term wealth growth to beat a short-term problem is going to harm your finances either way.
Inheritance disputes are soaring – here’s how to avoid painful family quarrels
Disputes around how a person’s estate should be distributed are soaring official figures show, attributed to poorly drafted, or the lack of, wills to set out their wishes.
Planning for what happens after you die may seem morbid, but it could help prevent extra stress and upset – as well as a large bill – for those you leave behind.
Research by law firm Nockolds shows there were 9,926 challenges to how inherited estates are managed and distributed – known as probate – in England and Wales in 2021.
The figure was up 37% compared with 2019, according to a freedom of information request (FOI) made by Nockolds and reported by the Financial Times.
Experts warn that an increasingly litigious society and rising house prices could be driving more people to block probate and try to take a share of or control a deceased relative’s estate.
This hasn’t been helped by the rise of online DIY services that let people prepare their own will online by answering a series of questions without consulting a lawyer.
Without clear instructions, family members could easily disagree about issues such as how you want to be buried and what happens to your hard-earned assets such as your savings and your home once you die.
Here is what to consider.
Make your wishes clear
The best way to avoid family disputes is by writing a will.
This is a legal document that sets out who should manage your assets and liabilities – known as your estate – and who should receive any of your wealth or possessions.
Research by Royal London shows 56% of adults in the UK don’t have a valid will, rising to 79% for 18–34-year-olds.
Without a valid will, your estate falls under the rules of intestacy.
This means that regardless of who you may have chosen, the law dictates the order in which people inherit your estate.
Under the intestacy rules, a spouse or civil partner is automatically recognised as the person who should benefit the most, followed by children.
This may create an issue if you have been living with someone but weren’t married or in a civil partnership.
They may not have any rights to your estate, even if you wanted to leave them your home or other possessions as there would be no document setting this out.
Avoid disputes
Just writing a will online may not be enough, especially for more complex issues.
An automated will writing service may not raise issues to consider such as if you are divorced, remarried or have children from different relationships, all of which could lead to different claims on your estate.
If there are disagreements or parts of the document are unclear, your will could be deemed invalid and moved to the intestacy rules.
Alternatively, your loved ones could end up in court to contest it, which can mean expensive legal fees. There are ways to avoid this before you pass away.
Some DIY services will let you pay extra for a lawyer to check your will, or you could consult a solicitor directly to ensure the document reflects your wishes and situation.
It is also important to review your will if your situation changes.
Royal London research shows six in 10 people haven’t reviewed their will in over a year, with 29% leaving it more than five years.
Plenty could have happened in that period such as a new child or property.
Inheritance tax
Your will is also an important inheritance planning tool.
Currently inheritance tax of 40% is paid on any assets worth more than a nil-rate band threshold of £325,000, plus £175,000 for your main residential property.
There is no inheritance tax between spouses though, so you can reduce the liability of your estate by passing on assets to your husband, wife or civil partner through a will.
You can also leave money to charity through your will and if you donate at least 10% of your estate then the inheritance tax rate drops to 36%.
None of this would be possible without a clear and concise will, saving your loved ones tax, legal fees and heartache.
Rail fares set to rise by less than inflation
Commuters braced for rising energy bills and higher borrowing costs may find their rail fare increases aren’t as bad as expected next January.
Despite train companies being private companies, the Government has the power to limit increases on some rail fares to ensure they do not exceed the cost of living and remain affordable.
Around 45% of all rail fares are subject to the Government’s cap including season tickets on most commuter journeys and some off-peak return tickets.
The increases usually take place each January and are linked to the retail price index (RPI) from the previous July.
Other services that link bills to RPI include broadband and mobile phone networks, which argue that increasing customer bills help maintain services and infrastructure.
This is a contentious enough issue as its calculations no longer meet international standards and it tends to be higher than the more widely recognised consumer price index (CPI).
Another issue is the actual RPI rate as a high measure can mean rail tickets are too expensive for travellers.
If train fares were to increase by July’s RPI rate next January, they could go up by 12.3%, the largest ever increase amid the ongoing cost-of-living crisis.
It wold mean, for example, that commuters travelling between Reading and London on any route would have to pay an extra £620 for the new season ticket cost of £5,664.
But the Government has instead said fares will not go up by so much and will be frozen until at least March 2023.
A Department for Transport spokesperson comments: “The Government is taking decisive action to reduce the impact inflation will have on rail fares during the cost-of-living crisis and will not be increasing fares as much as the July RPI figure.
“We are also again delaying the increase to March 2023, temporarily freezing fares for passengers to travel at a lower price for the entirety of January and February as we continue to take steps to help struggling households.”
Similar action was taken during the pandemic to give commuters more time to purchase tickets at lower prices.
The Government hasn’t confirmed how much the new cap will rise by, but this is usually confirmed each December.
Source:
https://commonslibrary.parliament.uk/how-much-could-rail-fares-increase-by-in-2023-and-why/
The World In A Week - In Liz we Truss?
Written by Millan Chauhan.
Last week, the Federal Reserve’s Chair Jay Powell delivered a hawkish stance stating that higher interest rates are needed to combat inflation. With annualised inflation having reached 8.5% in July 2022, the Fed now faces a balancing act between controlling inflation and causing an economic slowdown through aggressive hiking. Following Powell’s address, we saw US stocks tumble with the interest rate sensitive segments of the market the hardest hit. This also quickly spread to other geographical equity markets and stuttered the summer rally we have seen in equity markets. In the US, we also saw new single-family home sales fall to their lowest level in two years as higher mortgage rates make owning a home less affordable.
In the UK, we saw the energy regulator Ofgem announce an 80% increase in the cap of household energy bills to £3,549, effective from 1 October 2022, which has been caused by higher natural gas prices and a more restricted supply following Russia’s invasion on Ukraine. There have been further energy cap increases planned with the cap expected to rise beyond £5,300 by January 2023. We are also in the middle of the Conservative’s leadership contest which has been dominated by the respective cost-of-living stance of Liz Truss and Rishi Sunak. Liz Truss remains the favourite heading into the final week, with the outcome of the race set to be announced on 5th September.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 30th August 2022.
© 2022 YOU Asset Management. All rights reserved.
The World In A Week - Autumn is coming
Written by Shane Balkham.
Inflation continues to dominate investors thoughts and last week we had the UK’s rate of inflation climbing to 10.1% for July on an annualised basis, the first time the measure has registered a double-digit increase in more than 40 years. Prices rose 0.6% in the month of July, driven by the persistent increases in energy and food. Food inflation recorded 12.7% in the month of July, the highest rate for more than 20 years.
This data will certainly increase the resolve at the Bank of England to continue along the current path of interest rate hikes. Expectations for a further 0.5% hike at the next meeting have solidified. The quarterly analysis from the Bank of England in its Monetary Policy Report published at the beginning of the month, projected inflation to creep higher, with energy prices poised to soar with the energy price cap set to increase in October.
The situation continues to be highly politicised and whoever ascends to become Prime Minister will have to take measures to ease the pain being felt by consumers. This could mean using fiscal measures to subsidise fuel costs, while simultaneously tackling headline inflation. This scenario will undoubtedly add further pressure to an already stressful Bank of England.
The Bank of England is not alone. The minutes from the Federal Reserve’s meeting in July indicated that the Central Bank would continue to prioritise the fight against inflation ahead of economic growth for as long as it would take. Signals have become mixed, with the US inflation measures falling in July and the Federal Reserve minutes confirming a strong line on the battle to control inflation.
Even if elements of the inflation make-up are seeing signs of reducing pressure, it is clear that central banks will remain focused on fighting inflation, as they continue to play catch-up on a situation where they were caught sleeping. Cognisant of the ghosts of the past, central banks will not want to stop the rate hiking cycle too early and risk losing the loose grip they are perceived to have on inflation.
The end of the summer will be monitored closely, with the central bank committee meetings in September and the economic symposium in Jackson Hole, Wyoming next week. A political autumn of discontent with inflation to fight and a recession to avoid?
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 22nd August 2022.
© 2022 YOU Asset Management. All rights reserved.
Tax cut time? Here’s what Sunak and Truss are offering
The Conservative Party have decided to elect a new leader after Boris Johnson’s tenure as Prime Minister has come to an end.
But with the state of the economy in flux, the candidates need to be more careful than ever to emphasise their financial offerings to voters.
Here’s what each contender has said they would implement, and what that could mean for your money.
Rishi Sunak
The now former Chancellor, Rishi Sunak, was catapulted into prominence over his handling of the economy during the coronavirus pandemic.
From Eat Out to Help Out to the furlough scheme, Sunak was credited with staving off the worst effects of the lockdowns and fall out from the pandemic.
But the MP for Richmond in North Yorkshire has been widely criticised for his involvement as Chancellor in the subsequent economic issues triggered by the pandemic such as widespread inflation, soaring energy bills and raising taxes to pay for prior spending.
Sunak has pledged to cut the basic rate of income tax from 20% to 16%, but only by the end of the next Parliament – still seven years away. This would represent the biggest cut to personal taxes in around 30 years, were it to come to pass, and would save someone on an average salary of £32,000 around £777 a year.
However, if this level is matched in pensions tax relief, it would be a significant cut to the amount of tax relief anyone saving into a pension would get.
He has also committed to cutting that rate to 19% in 2024, but this was already announced before the leadership contest began.
Sunak has also promised to end VAT on energy bills should average prices rise above £3,000 per year, but this was only offered after initially declining to offer the cut. This would save the average household around £160 a year.
The former Chancellor has also promised to cut business rates in 2023. Beyond this however, he has been relatively quiet on financial policies, other than to criticise his opponent’s stances.
Liz Truss
The current frontrunner candidate Liz Truss has been vocal on her desire for the Bank of England base rate to move to a higher level. If she is made Prime Minister, she would couple this with significant tax cuts.
Tax cuts are the centrepiece of Truss’s offering and she has said she intends to “start cutting taxes from day one.” Her proposals add up to some £30 billion of cuts to taxes.
This includes scrapping the 1.25% National Insurance hike, and the 6% corporation tax hike which is due to be implemented next year.
The current Foreign Secretary has also pledged to scrap green levies on energy bills for two years to help households struggling to pay as prices soar.
Truss has also said she would include inheritance tax in a wider review of the tax system – looking at whether it is fit for purpose.
Truss says she intends to pay for the tax cuts by renegotiating the way the Covid-accrued debt is paid, making it a longer-term debt more similar to the way the Government paid back its debts after the Second World War.
While the contest is ongoing and more pledges are no doubt coming through the pipeline, readers must remember that these policy announcements are largely designed to appeal to the Conservative Party membership.
With the Bank of England predicting 13% inflation by the end of the year, whoever takes over at No.10 will no doubt have to adapt to the situation as it develops.
Energy bills set to worsen this winter – top tips on how to save
Energy bills are set to soar again this winter as the energy crisis in Europe worsens.
Prices have soared in the past year as demand surges – this has been greatly exacerbated by the conflict in Ukraine and ensuing tensions with Russia.
As a result, the current price cap on energy bills, as set by energy regulator Ofgem, is £1,971 having increased from £1,277 on 1 April.
But as announced on 26 August, this cap will now rise to £3,546 on 1 October.
In practice these figures are quoted for the ‘average’ home usage, so you could end up paying more (or less) depending on what you actually use in your home.
Although tricky, this means it is still possible to save money on your energy bills. There are a few ways of doing this.
Make changes to your home
The first, and more costly way to make long-term changes to your energy consumption is by changing the way your home uses, conserves, or even produces energy.
The Government has launched a tool that you can use to get an idea of what potential upgrades you can make to your home, the costs and potential savings.
Ideas include installation of cavity, roof and floor insulation. Also, installing a heat pump to replace a gas boiler, or solar panels to produce your own heating or energy.
It also includes ideas such as upgrading your windows to double glazing, installing smart thermostats to regulate your heating more efficiently or buying more energy-efficient home appliances.
While these are all good ways to make your home more energy efficient, the issue with many is that they’re either not practical depending on your property or require personal investment that won’t realise the financial benefit for some time.
Taking the aforementioned Government tool can give you an idea of the saving and costs of each idea.
Make changes to your behaviour
This is where behavioural changes come in and provide the possibility to save money immediately on your energy bills.
All the figures below are quoted by the Energy Saving Trust based on current energy price cap levels and average household by size and usage levels – so this is liable to change come October. But if anything, the cost savings could get better. Here are those tips:
- Ditch one bath a week for a shower – £12
- Reduce dishwasher usage by filling it completely – £14
- Turning off all lights in rooms you’re not using – £20
- Washing your clothes at 30 degrees and reducing your number of washes with larger loads (i.e., don’t put one jumper in and put a wash on) – £28
- Insulate your hot water cylinder if you have one – £35
- Fill the kettle to the level you need, not the top – £36
- Installing draft excluders or cushions on doors to prevent heat loss to rooms you’re not using frequently – £45
- Turn off the electronics in your house instead of leaving things like TVs on standby when you’re not using them – £55
- Dry clothes on a rack or in the garden, avoid the tumble dryer – £60
- Take shorter showers. The Energy Saving Trust says under four minutes is ideal – £70
While all these behavioural tweaks save fairly small amounts individually, taken together you’re looking at around £375 a year less on your bills. Were the price cap to rise to £3,400, this would be a saving of around 11% – no small amount.
While in the context of long-term wealth growth this might seem like small fry, the truth is cutting day-to-day living costs is one of the most effective ways to save more for the long term.
Amazon Prime hikes prices – time to review your bills
Amazon has announced it is hiking the cost of its Prime streaming and one-day delivery services.
With the cost-of-living rising, it’s time to review your non-essential bills. It happens to even the most prudent of us, especially thanks to the pandemic.
Stuck at home, we signed up for a range of new services including streaming, food delivery and other non-essential products.
But as we leave the pandemic behind and life returns to a ‘new’ normal, the cost of living is soaring, with inflation currently 10.1% on the consumer prices index (CPI) measure.
Unfortunately, no household is immune, and even longstanding services such as Amazon Prime – which has not increased prices in eight years – are not saved from hikes.
Amazon Prime is increasing its cost from £7.99 to £8.99 per month, or if you pay annually, £75 to £95. While this is not a massive increase individually, replicated across a range of services you could find your bills going up hundreds each year (not including energy, which is facing a major crisis and we handle separately in this blog.
How do I save on my bills?
The first thing to do if you feel you’re spending too much on your bills is to do a full audit of how much you’re paying for each item – looking at the monthly and annual costs.
In many cases, for products such as insurance, or even Amazon Prime, paying annually will save you money, so if you’ve got the financial resources to do that, it can be a good idea.
Once you’ve got a sense of what is going out, look at when your contracts expire. For phone, broadband and mobile bills you should never be paying more than the best deal on the market, if you’re out of contract.
Providers should alert you these days when your contract is expiring but be vigilant and shop around for better deals using price comparison sites. Mobile phones in particular can leave a costly bill in place that is unnecessary. While some providers such as O2 will lower your bill once you’ve paid for your handset, others will let it run at the same rate, which you’re not compelled to pay.
Next it’s essential to ask yourself – do I really need this? A common problem where costs proliferate in this area is streaming services. With such a wide variety available it’s tempting to have them all, but this could set you back hundreds a year. Ask yourself if you really need them all, or maybe cut back to your favourite. There are even free options available such as All4, which provides hundreds of TV boxsets totally for free.
Likewise, this is an issue when it comes to services such as Sky TV. The contracts tend to be very expensive, with price increases baked into the contract. There are cheaper alternatives such as streaming via NOWTV – which is just the digital equivalent of the same service. Separating out your telecoms bundle into separate broadband and TV services could lead to significant savings.
When it comes to other fixed cost bills such as water, council tax and TV licence, unfortunately these might not be possible to avoid or minimise. But there are a few tweaks you can make.
If you don’t watch live TV, or use BBC catch up services such as iPlayer, you don’t have to pay a TV Licence, for instance. Anyone living alone is eligible for a 25% council tax discount, while ensuring your property is in the right band can also save considerable sums. Altering your council tax band can be risky however as your local council might decide you should be in a higher band.
It is however worth researching whether your property is in the right banding. In the early 90s councils conducted so-called ‘second gear valuations’ where they would drive through neighbourhoods making valuations on the fly, leading to some very distorted bandings. It is worth looking into, Money Saving Expert has a more detailed guide if you wish to learn more.
Inheritance tax interest costs soaring for bereaved families
A little-known process for paying inheritance tax is sending payments soaring for bereaved families thanks to the Bank of England.
The issue arises where a family has an inheritance tax (IHT) liability to pay after losing a loved one.
The Government, to give families the ability to pay the liability without being forced to sell the assets such as home, offers payment by instalment.
But there is a little-known caveat to this which is sending payments soaring for many.
Interest rate hikes from the Bank of England are hiking these IHT payments. Families are obliged to pay an interest rate of the Bank of England base rate plus 2.5%.
This means the rate of interest on the instalments is currently 4.25% – higher than some of the best loan rates on the market.
How do IHT instalments work?
When inheriting assets from a loved one, the Government allows bereaved families to pay the IHT due on the value of their home over 10 years in annual instalments.
If you sell the house, you have to pay the liability in full straight away. The first instalment is due within six months at the end of the month in which the death occurs.
For shares and other securities, families can pay the IHT liability in instalments if the person who has passed away controlled more than 50% of the company.
How to minimise IHT costs
HMRC has seen a year-on-year increase in the number of estates paying IHT. This is because while asset prices have grown steadily over time, the Government has frozen the thresholds for paying the tax.
This means families become subject to liabilities, purely because the value of their assets are increasing to a point over the threshold.
Fortunately, there are good wealth planning solutions to mitigate the costs of IHT with regards to property.
A single person has no IHT liabilities on the first £325,000 of their assets. With the addition of the residence nil rate band this rises to £500,000 if the asset in question is your main home. The extra £175,000 is only available if the house (or its value) is being left to a direct descendant, (Children, Grandchildren, Adopted Children). So, if leaving to trust or to a sibling or nephew for example, it isn’t available. For a married couple this allowance effectively doubles to £1 million-worth of property if it is your main home.
However, once an estate reaches £2 million in value, the home allowance is removed by £1 for every £2 above the threshold. This effectively removes the allowance once an estate is worth over £2.3 million.
There are other strategies to help minimise the bill, including the way you structure assets, where you invest your wealth, and how you gift it away.
If you would like to discuss the themes in this article or would like more information on anything relating to inheritance tax, don’t hesitate to get in touch.
The World In A Week - A nation in mourning
Written by Shane Balkham.
While we welcomed in the new prime minister, Liz Truss, last week was dominated by the sad news that her majesty Queen Elizabeth II had passed away. It is indeed a sombre occasion and one that will be marked by ten days of official mourning.
It does present challenges for the new prime minister, as from 9th September all parliamentary business is suspended until after the official mourning period has finished. It has been suggested that the official day for parliament to recommence would be 22nd September, however there was a planned recess from that day until 17th October, to allow for political party conferences to be held.
Arguably, the most challenging item to resolve during the mourning period is Liz Truss’s £150 billion energy support package. It is fully expected that the energy price guarantee will be in place for 1st October, however legislation will be needed to extend that support to Northern Ireland.
The Bank of England has also announced the delay of their September Monetary Policy Committee (MPC) until after the official funeral. The MPC will now meet on 22nd September, which is a critical date, putting it after what is widely expected to be an emergency budget announcement on 21st September. That said, it is still unclear how parliamentary business will proceed throughout the period of mourning.
Having a reign that lasted 70 years and 214 days does allow for some interesting reflections; according to a Bloomberg columnist, the British stock market multiplied more than 2,500-fold during the Queen’s reign. It reminds us that long-term decision making is a powerful tool and something we can all adopt for our investments.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 12th September 2022.
© 2022 YOU Asset Management. All rights reserved.