Could you help your children have a £1 million pension?
Using your gifting allowance effectively could mean you're able to leave your children or grandchildren a significant, tax-free gift behind in the form of a £1 million pension. Discover the steps you can take to reach this goal.
With auto-enrolment now in full force, the topic of saving for retirement has never been more relevant for younger generations. Research has suggested that most people aren't saving enough to achieve the lifestyle they want when they retire, indicating that more than a few future retirees will experience a shortfall, with past research from Hymans indicating a UK-wide shortfall of £5 trillion.
Whether you're a parent or grandparent, using gifting rules and tax efficient saving schemes could help you secure a child's future once they finish work or help get them on to the property ladder.
Previous research from Aegon indicated that 12 million people weren't saving enough to provide the income they require in retirement, with many incorrectly estimating the sums required to generate an income in retirement. The firm's analysis found that people on average earnings required a pension of £301,500 to maintain their lifestyle in retirement. Future retirees that are planning to use their years after work to travel and explore new hobbies without the restrictions of work will need significantly more.
With the rising cost of living, the challenges of getting on the property ladder and student debt increasing, helping children and grandchildren experience long-term financial security is becoming a common goal. The good news is that with a bit of forward planning it is possible to help your child or grandchild have the means to purchase a property in adulthood or even secure them a £1 million pension.
Rather than leaving your loved ones an inheritance, which may be subject to Inheritance Tax (IHT), you can use your money to help children build wealth while you're alive. It gives you an opportunity to firstly leave a larger legacy and to see your loved ones enjoy your generosity while you're still with them. With IHT reaching record levels last year, it's an option that's worth exploring.
Laura Suter, Personal Finance Analyst at investment platform AJ Bell, said: Parents or, potentially more realistically, grandparents can save on their inheritance tax bill and pass substantial sums to their children or grandchildren by making use of lucrative annual gifting allowances.
Figures released recently showed record levels of inheritance tax were paid last year, topping £5.2 billion. As more and more people are caught in the net of inheritance tax, it's more important than ever to make use of the allowances the Government hands you.
Using your gifting allowance
If you're worried about your children and grandchildren facing a significant IHT bill when you pass away, using your gifting allowance wisely can help to put your mind at ease. It's a way for you to pass on substantial sums over time without being subject to IHT.
To begin with, your annual gifting allowance is £3,000, this is money that will always be free from IHT. Should you decide to gift over £3,000 annually, there's the seven-year rule to think about. Should you die within seven years of a monetary gift being received that went beyond the gifting allowance, IHT may need to be paid.
By making full use of the annual £3,000 gifting allowance to help children, AJ Bell has calculated that families could save £43,000 in IHT if both parents and grandparents use it to build wealth over an 18-year period.
What to do with the gifted money
According to the research from AJ Bell, if both parents and grandparents maximise their gifting allowance from the first year of a child's life right through to reaching 18, the child will have accumulated £108,000 before they even leave compulsory education. With this in mind, how should you hold this money to ensure it benefits them in the long-term?
There are two potential options to consider, a pension and a Junior ISA, depending on how you want the money to be used and accessed.
Junior pension
You can start saving for your child's future right away with a pension.
For children, contributions to a pension benefit from 20% tax relief up to a maximum annual contribution of £3,600. That means if you contribute £2,880 on behalf of your child or grandchild, they will receive a tax relief of £720 (which is effectively 'free money'). AJ Bell's figures show you end up with a sum of £64,800 over an 18-year span. Assuming returns of 5% after charges, your child's pension will have reached £105,197 before they start their working life.
Without any further contributions, AJ Bell's figures indicate it will take 46 years for the pension to reach the £1 million milestone, allowing your child to comfortably retire and enjoy their later years by the age of 64.
Of course, there is no guarantee that this will be the actual amount that will be in your child's pension. A range of different factors, including rate of return and charges levied, have an impact and need to be considered.
Laura Suter comments: Given the growing savings gap in the UK, a £1 million pension pot is an amazing thing to create for a child and gives them one less thing to worry about as they struggle with student debt.
Of course, with the right financial knowledge instilled, the child's pension should continue to grow, for example, through workplace contributions. However, one area to be mindful of is ensuring that they don't end up breaching their Lifetime Allowance on their pension. This is currently set at £1.03 million but it is a figure that will rise alongside the cost of living as it is index linked.
Junior ISA
If you want to ensure your child or grandchild has a significant financial buffer before they reach the age of 18 but don't want the restrictions of a pension, a Junior ISA could prove to be the better option for you. Rather than having to wait until retirement age, the child would be able to access the money once they reach adulthood, making it an excellent option for providing support to get on the housing ladder.
Junior ISAs can be used from birth up to the age of 18, with an annual contribution limit of £4,260. If you only used your £3,000 gifting allowance to make yearly deposits in an account that benefitted from 5% interest rates, the sum would total £87,664, which would be tax free to withdraw. Taken out at 18, the Junior ISA would provide a sizeable deposit for a home. Alternatively, if the account was left accumulating interest with no further deposits for a further decade, it would reach £144,383, AJ Bell's calculations show.
Get in touch with us to discuss the most tax efficient way to gift and maximise your legacy with securing your children or grandchildren's future in mind.
What's on the line for first-time buyers?
89% of first-time buyers describe the process as 'really difficult' with deposits, mortgage refusals, and purchases falling through being the biggest struggles. Find out how to make the process smoother.
First-time buyers are facing an array of difficulties due to the pressures of the market as they embark on their home buying journey. According to research, almost nine in 10 (89%) of prospective first-time buyers describe the process as 'really difficult'.
A survey from challenger bank Aldermore revealed there are four key areas that first-time buyers struggle with when they're aiming to buy the perfect starter home.
1. Raising a deposit
Four in 10 prospective buyers cited raising a deposit as their number one obstacle to owning a home. With home buyers taking an average of eight years to save a 20% deposit, according to Nationwide, it's no surprise that it is seen as an intimidating task. To make the process easier, 27% of future homeowners are living with friends or family while they save, and a further 33% would consider it if it sped up the process.
2. Being refused a mortgage
Once a deposit has been saved, it's not the end of woes for first-time buyers. While being refused a mortgage was the biggest concern for just 10% of prospective buyers, a quarter find that their application is initially refused. The findings indicate that it's critical for first-time buyers to assess their financial health and credit score before approaching lenders.
3. Purchases falling through
Having secured a mortgage, almost half (48%) of first-time buyers find that the deal on their first home falls through. With the associated losses of a deal falling through mounting up to £2,200, it's a costly setback. For the 10% that took three or more attempts to secure a deal on a house they wanted, they can find the expenses rival the deposit.
Of those that have experienced purchases falling through, almost two-thirds had to delay buying their first home as a direct result, with 23% putting off the milestone for more than a year.
4. The uncertainty of the house buying process
Next on the list of concerns is simply a lack of knowledge about the steps that need to be taken during the buying process. Some 9% said it was the hardest part of buying a house, with 52% stating it made them ill and 46% saying it caused tension and issues within their relationship. A lack of knowledge can make what should be a time for celebrating unnecessarily stressful but seeking support can help.
How to make your home buying process easier
Despite the challenges of getting on the property ladder, the research also found that, for most, it was worth it. Some 79% of survey participants said that owning their own home made them more financially stable, which is allowing them to plan for the future. For four in five people, it was also considered a bonus that they were no longer wasting money on rent and they believed they would be in a position to move up the property ladder when the time came.
Luckily, there are some steps you can take to improve your home buying process.
- Saving for a deposit: The first hurdle for most first-time buyers is getting the all-important deposit together. With typical deposits being 10% of the property value, it can seem like a daunting task. However, using a Lifetime ISA (LISA), assuming you qualify, is one way to build your savings up quickly. Each tax year you can add up to £4,000 into the account and the government will provide a bonus of 25%.
- Improve and maintain your credit score: Your credit score will dictate what mortgages are open to you. The better your credit score, the more competitive your interest rate will be, it can make a big difference to your monthly repayments and how long it takes you to pay off your mortgage. Taking steps to improve your score, such as clearing debt, making credit card payments on time and registering on the electoral roll should be a priority.
- Assessing location and prices: If you're finding that house prices are out of your range or you're putting in offers that are being beaten, it might be time to reassess where you're looking. A slight postcode change could mean you knock thousands off asking prices, making your first home more affordable.
- Researching types of mortgages: If your first mortgage application is refused, don't panic, there's more than one option available. Just because one mortgage lender says 'no', it doesn't mean that every bank or building society will take the same view. For example, some lenders offer mortgages that require lower deposit amounts or allow you to use a guarantor to access better interest rates.
- Check available help: For first-time buyers that are struggling, it's important to remember that help is available. Often your first port of call will be family. While some first-time buyers are lucky enough to be able to use the bank of mum and dad to gather a deposit, others aren't but acting as a guarantor and simply offering advice can still be invaluable.
The government also provides support for first-time buyers, for example, through the Help to Buy equity loan scheme, which can give you access to up to 20% (40% in London) of the property value to minimise the mortgage needed.
If you're embarking on your journey to buy your first home, talk to us for more information on how to make the process smoother from beginning to end.
The six biggest money worries for millennials
Money concerns are a big worry for the millennial generation as they make plans for life milestones. But what areas can they improve to reach financial resilience?
Money concerns are harming the millennial generation's ability to plan for the future due to poor finance education in schools, new research from Samuel & Co Trading has revealed.
Despite calls for financial education to be taught in schools alongside other core subjects, it is yet to be added to the curriculum. As a result, there is a high chance that young adults who are taking their first steps on the housing ladder, starting families, and planning for retirement are feeling put on the back foot when they look at their finances.
The research questioned 1,000 British citizens to discover the problems they have with understanding basic finance. It revealed seven money worries for the millennial generation.
1. Saving for unexpected costs
Life throws frequent obstacles at families, including those that require money to smooth over. From the boiler breaking down to being unexpectedly made redundant, as well as illness, injury, or even death, there are many instances where having a financial buffer can help. We all know we should have some money put aside to cover unexpected outgoings. However, the study found that it's a safeguard many millennials are missing.
According to the survey results, more than two in five (43%) Brits aged between 18 and 24 do not have any savings at all to cover unexpected costs. Whether you recognise your financial situation in that statistic, your children's or even your grandchildren's, not having the money to cover unexpected costs can push people into debt, harm their lifestyle, and cause unnecessary stress. Building up a savings account that is there should they ever need it can give millennials peace of mind.
2. Planning for the future
The survey found a lack of financial planning for the future was an issue that affected individuals of all ages. When asked if they had a five-year financial plan, 77% of women and 47% of men admitted that they didn't.
For the millennial generation, a five-year plan is likely to focus on getting on the housing ladder but should include other areas too, such as beginning to build up wealth through a LISA or Workplace Pension. Armed with a plan and financial goals for the next five years, you are far more likely to be in a better position over the long-term.
3. Understanding pension and tax outgoings
Some 78% of women revealed they did not know how much they paid into their pension every month and 35% didn't know how much tax they paid. The survey found that half of the men questioned were not sure of their pension contributions and 45% did not know the amount of tax they paid out of each pay cheque.
With auto-enrolment meaning the majority of millennials will now be paying into a pension, it's vital to understand salary outgoings that are applied to each payslip. Taking the time to review pension contributions and understand the income they'll provide for your financial future can help set you on the right path financially.
4. Confidence managing money
Across survey participants, it was found that many Brits do not feel confident managing their money. In fact, a lack of financial knowledge has led to a quarter of women feeling ill at ease when considering their money and 14% of men feel the same. With money concerns having implications across numerous areas, including health and mental wellbeing, taking steps to improve knowledge of the most common areas can have a hugely positive impact.
With a greater level of confidence when managing money, you will be in a better position to take control of your finances and ensure your actions reflect longer-term aims.
5. Knowledge of credit cards
Credit cards are a commonly used way to access credit when you need it. They're often used as a way to make big-ticket purchases, cover unexpected outgoings, and build up a positive credit rating.
Yet, despite this, 28% of women and 21% of men stated they did not understand the terms and conditions of their personal account.
Getting the most out of a credit card and minimising charges placed on purchases and balance transfers means it is important to understand the finer details. While reading terms and conditions can seem like a daunting task, it is one that should be considered critical.
6. Getting to grips with financial vocabulary
If financial jargon leaves you feeling confused, you're not alone. Six in 10 women and 38% of men, stated during the survey that they didn't understand financial vocabulary. It is a lack of knowledge that can hinder their confidence and ability to order their finances in a way that suits their lifestyle and plans.
Working with a professional that explains finance matters in a clear, transparent way can help you get to grips with your money. Understanding the most commonly used finance vocabulary will have a positive influence on the other common money worries millennials face too, from understanding the terms of a credit card to feeling confident on financial matters.
To gain a better understanding of your own finances or to help your child or grandchild plan their financial future, please get in touch with us.
Going away? Don't forget your travel insurance!
We're always talking about long-term financial planning, however, as we reach a time when those with children might be taking advantage of lower cost holidays, we thought it sensible to talk about travel insurance.
Did you know that almost half (49%) of British jet-setters don't take out travel insurance at the same time as booking their trip? And 23% don't take any at all.
There were 72.8 million overseas visits from the UK in 2017 (Source: Office for National Statistics (ONS)), and half of those were unprotected.
Cutting it close
While many aren't buying insurance at the same time as making travel arrangements, they won't all be completely unprotected, as some will buy at a later date. However, the closer to their departure they do leave it, the longer they are at risk of losing money if their travel is cancelled or needs to be rescheduled. According to research from Aviva:
- 24% buy insurance shortly before their journey: Putting them at risk of financial loss if anything goes wrong before that time.
- 2% buy their insurance at the airport, just before they take off: By this point, your holiday is already underway and there is not much time to consider the terms you are agreeing to, or to shop around for better coverage or prices. You are effectively given take-it-or-leave-it options.
However, some insurance is better than no insurance…
For the 23% of people who do not take out travel insurance at all, a cancelled flight, injury or illness means that they are likely to lose all the money they have put into the holiday, as well as potentially facing further costs if they need to access healthcare or re-arrange the return leg of their journey.
What do people believe about travel insurance?
The research has shown that there is a stark difference between the role travel insurance plays in holiday planning, and what travellers expect it to be able to do for them. For example:
- 12% of people believe travel insurance will cover the cost of their holiday if they are unable to go due to a pet dying the day before departure
- 6% think they will be able to claim a refund through their insurance if they oversleep and miss their flight
- 4% believe they are covered if they miss their flight due to an excess of drinking or shopping in the airport
Unsurprisingly, none of these situations is covered by travel insurance.
So, what does travel insurance do?
Travel insurance is usually offered as a package which covers:
- Travel interruptions, delays and cancellations
- Lost luggage
- Medical cover and evacuation
Other options may be available, but this will vary between providers.
Adam Beckett, Product and Propositions Director, Aviva UK General Insurance, explains: Travel insurance provides important protection before you go away, say if you, or a close relative, falls ill. It's also there for medical emergencies while abroad which can be very costly, or if your belongings are lost or stolen. It's important to get the right protection for your needs so you can relax on holiday knowing you are fully covered.
How big is the risk?
Travelling without insurance poses a risk to your wellbeing; physically, mentally and financially.
The research shows that the most common reason (33%) for making a claim on travel insurance is a medical emergency, at 33%. If you fall ill while in another country, you may be in for a shock. Most places do not benefit from the generous healthcare system we have in the UK. Even in countries where care is free 'at the point of service', treatment is often followed by large bills.
Of course, a European Health Insurance Card (EHIC) is useful when travelling within those areas, but, it may not be enough, and it is likely to be ineffective in a few years anyway.
Some examples of claims made last year include an individual who suffered from a stroke in the USA and claimed £182,000 in medical bills, and a pneumonia case in Malaysia, which was awarded £191,000.
Of course, if you can pay those kinds of bills out of pocket, you don't need travel insurance. But, if that kind of money makes your eyes water, make sure you're covered from the point of purchasing your tickets.
What should you do next?
If you have a trip planned and have not yet bought insurance, your first step should be to put that right, as soon as possible.
Once that is in place, you need to think about other decisions which might need to be made in your absence. As much as we hope your holiday goes smoothly and you return to the UK unscathed, it is a good idea to have a will and Lasting Power of Attorney (LPA) in place, to ensure that you are covered in all possible situations.
Why?
A will dictates what happens to your belongings, dependents and property when you die. It means that your family avoids the lengthy process of having your estate distributed according to the laws of intestacy. Having a will in place means that your assets are given to the people you want to have them.
LPA gives someone you trust the authority to make decisions on your behalf if you are unable to, due to mental or physical impairment. There are two types of LPA; those who make decisions about healthcare and those who are responsible for financial decisions. If you are in a coma or seriously ill, the people you have appointed LPA will make choices based on your wishes and in accordance with your best interests. It is important to make sure that you discuss your wishes with the people you appoint LPA to, so that you can be confident that any arrangements made on your behalf will reflect the things you want.
It might sound a bit morbid, but once you have your protection and paperwork in place, you will be able to enjoy your holiday that little bit more, knowing that you have done everything you can to ensure you and your family are protected in all scenarios.
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."
Retiring on time: Five tips for giving up work on your own terms
Do you have a dream retirement age in mind? Most people do.
Unfortunately, many people believe that, no matter how hard they wish to retire on time, they will be beholden to their employer long past the age they'd like to be putting their feet up.
The situation
According to research from Scottish Widows, more than 10 million UK adults estimate that they will need to continue working until they are no longer physically able to do so. Furthermore, three million people say that they have no choice but to work until the end of their life.
Less than a quarter (24%) of people expect that they will have left working life behind completely by the time they reach 65, with the least optimistic outlook held by younger generations.
51% of people expect to remain employed on at least a part-time basis; and just 18% say that this will be down to preference, rather than necessity.
Your options
Retiring at a reasonable age shouldn't be impossible, but it will mean planning ahead and might mean making some changes to your current financial habits.
1. Know your position
Look at what you are currently doing to prepare for retirement and use a calculator (such as this one) to work out:
- How much you are likely to have in retirement, without making any changes
- What age you could retire
- How much you will need (lump sums and income) to retire on your own terms
- What the shortfall is
You can then use this information to determine what needs to change between now and the age you want to retire, to ensure that you have enough money to support your desired lifestyle.
2. Save more
Putting more money aside now, will give you more income when you choose to access it. It sounds simple enough, doesn't it? But, according to the research, 23% of 25-54-year olds are concerned that they are not putting enough away for the future. Meanwhile, 39% fear running out of money completely after they give up working.
3. Take advantage of the helping hands offered
If you are paying into a workplace pension, you already have a great foundation for sensible saving habits. However, for those who have joined a pension through the introduction of automatic enrolment, the minimum contributions made by you and your employer are unlikely to be enough to provide an adequate retirement income.
Currently, your employer must contribute the equivalent of 2% of your pensionable earnings (the income you receive between £6,032 and £46,350 each year), whilst a further 3% is taken from your salary before you receive it. Unfortunately, current expert guidelines state that the average worker will need to put a total 12% of their annual earnings to one side, meaning that many people currently contribute less than half of what they will need to live the retirement lifestyle they aspire to.
4. Repay debts
If you can retire without debt, you will be able to do more with your income. Reducing your living costs as you enter retirement will make a big difference to your ongoing budget. With a smaller portion of your retirement income being lost to repaying debts, you will have more available to enjoy the retirement lifestyle you want.
How you achieve this will differ, depending on your circumstances. But it could include moving into a smaller property, cutting back on non-essential spending and even smaller changes, such as shopping around for better deals from utility providers.
5. Talk to a professional
Engaging with a financial adviser or planner will help you to get on the right track to retiring on your terms; your income and age of choosing.
Research has shown that, those who seek the help of advisers and planners can save up to £98 per month extra toward their retirement income, which could give you an additional £3,654 per year to live on when you stop working.
Planning for retirement can be a daunting task. But, by talking to the right person, you can ensure that you are able to stop working, when it suits you, and with the retirement income you want. For more information or to get started, why not get in touch with us?
Further interest rate rises predicted: How to stay ahead
We're almost half way through 2018, and it's likely that you've already thought ahead about some things. Maybe you're planning a trip abroad during the summer holidays, or you're a really eager Halloween costume aficionado (and we won't mention those who are already thinking about tinsel and stockings!).
But have you thought about interest base rate rises?
They're not as exciting as holidays and parties, granted, but it is important to act now if you are going to protect your finances from the impact of the predicted increases over the next 12 months.
What's likely to happen?
According to experts, the Bank of England (BoE) is likely to raise the base rate twice in 2018, with another two increases expected to follow next year (Source: EY ITEM Club. Naturally, all financial predictions should be treated with an amount of scepticism, however, it seems certain that when rate rises do come, they will be gradual in nature.
Nonetheless, borrowers should not underestimate the impact on their personal finances, nor should savers overestimate the benefits of them.
If the predictions made come to fruition, the base rate may increase by as little as 0.25% each time, but that will still be a minimum increase of 1% over the next 24 months. Whilst it might not sound like much (especially if you remember the late 80s and early 90s), it is likely to impact you.
What will an increase mean for you?
There are two sides to the potential effects of base rate rises; the negative impact on borrowers, and the benefits it can bring for savers.
For borrowers:
Last year, it was estimated that 3.9 million homeowners had variable, or tracker mortgages (Source: Council of Mortgage Lenders). That means that just over two fifths of homeowners face a rise in monthly repayments every time the base rate is increased.
Variable and tracker rates are, by definition, not fixed. Therefore, when the BoE increases interest rates, this rise is passed on by the mortgage lender to those people with these types of mortgages, pushing up their monthly payments.
If you have a tracker or variable mortgage, the first thing is to understand how much your mortgage payment will increase by if interest rates rise, then ask if you can afford it. If not, it is time to start looking at your options. These include:
- Moving to a fixed rate mortgage
- Cutting back on other expenses to free up the money to cover the increased payments
- Use the time you have to head off any rises and start putting a financial buffer in place which can absorb the extra costs for a while
Fixed rates are usually offered on a fixed-term basis, so it is likely that you will need to shop around every two-to-five years to find a product that suits your needs.
For savers:
Increases in interest rates are mostly good news for anyone building their savings. Whether it's to be used as a deposit on your next home, or you are concentrating on making sure that you have enough to live on in retirement, higher interest rates should give you better returns on your savings.
However, it is unlikely that providers will be rushing to pass any rate rises onto their customers, so where you choose to keep your money now, will matter in the long run. That means that you will need to shop around if you are to see the best possible growth in your savings.
It is also important to keep inflation rates in mind. Even though they may show signs of having peaked last year at a post-Brexit-vote high, it is still tough for savers to find a real return on their money and this is unlikely to change anytime soon.
Our three top tips for finding the best saving account are:
- Shop around; using more than one comparison tool
- Consider differ types of account; could locking money away in fixed-growth options be better for you?
- Do your research into how providers reacted to the previous rate rise; if they were reluctant to pass the increase onto savers, they are unlikely to act differently during future rises
Where to go from here
Whether you're currently borrowing or saving (or, most likely, a mix of both) you will undoubtedly be looking for ways to stay ahead of the potential base rate rises over the next 24 months. The best way to do this is to engage with a financial planner or adviser to develop a strategy and gain insights which will enable your money to work for you and allow you to meet your financial goals.
For more information, or to get started, feel free to get in touch.
Gender pay gap does not need to continue into retirement
Historically, men have received more money annually from the State Pension than women. In a recent Which? survey it was shown that over 20 years, women would receive £29,000 less on average than men; however there are a few factors at play that mean the annual discrepancy may be largely offset. These include women receiving their state pension earlier than men at 60 and not 65. With the state pension age now being very close to equalised, how will this effect women going forward - will they continue to take a reduced annual benefit than men?
How the State Pension is calculated
To be eligible to receive any State Pension, you must have at least 10 years of National Insurance contributions on your record. How much you receive each week will depend on how many qualifying years you have in total, and to receive the Full State Pension, you will need a minimum of 35.
Qualifying years can be accrued in three ways:
- By paying National insurance through an employer or self-assessment
- By receiving National Insurance Credits, which are awarded by claiming some State Benefits
- By making voluntary payments
Where is the gender gap?
The main reasons for the gap in pension benefits are: women are more likely to work less hours, women have historically earned less than man, have taken time off work or leave employment altogether for periods of time during their lives to take care of children and or elderly and infirm relatives.
The new flat rate of state pension benefit that was introduced in April 2016 (currently £164.35 per week) is designed to rectify the previously mentioned issues that currently negatively affect women. In the past, a part of the state pension was based on earning and the more you earned the more you would receive from the state in retirement. This has been replaced and you are now awarded a flat credit for each year you earn more than £6,032 per annum no matter how much you actually earn in any one year.
Childcare and National Insurance credits
Parents who receive Child Benefit and are caring for a child under the age of 12 receive National Insurance credits automatically. If a parent is not entitled to Child Benefit they should still apply and ask for no payments as this will activate the automatic credit and count towards the state pension.
Grandparents and other family members aged over 16 but under state pension age that provide care for a child aged under 12 may also be able to get Specified Adult National Insurance credits. These are not credited automatically and need to be applied for (using form CF411A).
State pension credits for carers
If you receive Carer's Allowance, you'll automatically receive credits on your National Insurance record and therefore credit for your state pension.
Understanding your State Pension should be seen as part of the wider retirement planning process. So, to make sure that you have enough retirement income to achieve your goals, you can:
- Calculate how much you will get:
Using a State Pension forecast calculator, you can see how much you will have when you stop working and need to access your pension.
Knowing how much you will have if you don't make any changes to your current situation will help you to identify any shortfall.
- Fill in any gaps in your record:
You can view your National Insurance record and make any voluntary contributions by clicking here.
- Evaluate your other pensions:
Knowing what you can expect to get in retirement income from your workplace or personal pensions will give you a better idea of the overall income you can expect to receive when you stop working.
- Seek financial advice:
Research has shown that those who engage with a financial adviser or planner could put an additional £98 toward their pension each month. This equates to an extra £3,654 in annual retirement income for later life.
Talking to a financial planner will also enable you to make better financial decisions and create a plan which will see you meeting your long-term retirement goals by making adjustments and changes in the short-term.
To get started, please feel free to contact us.