The tax trap that’s catching out thousands of new mums
I see that the Sunday Times is reporting that "tens of thousands" of women are losing years of National Insurance credits by not registering for child benefit - even if they do not need it - when they have a child. The reason for this is that some people may have to pay a tax charge if their (or their partner’s) income is over £50,000 per annum so they don’t bother to even register. However, this could be a costly mistake leading to the loss of national insurance credits that would otherwise have gone towards the State Pension. This is turn affects an individual’s eligibility to the full State Pension because it will take longer to build up the National Insurance record to the required 35 years.
Far more women are affected than men because they make up the majority of stay-at-home parents. Once parents realise they should be registered, they can claim just three months of backdated credits. Mumsnet founder Justine Roberts said: "Unless you have the natural inclinations of a tax lawyer, it is all too easy to miss. Women already face a pensions gender gap - making the rules around child benefit clearer would help to redress the balance."
Child benefit is available if you’re responsible for one or more children under 16 (or under 20 if they stay in approved education or training).
Pensioner numbers double during Her Majesty's 60 year reign
The number of pensioners has doubled in the 60 years since the Queen took the throne and 44 times as many people reach age 100.
Figures from the Department for Work and Pensions also showed people, on average, are living nearly a decade longer. There are 5.6 million more pensioners today than in 1952, rising from 6.8 million to 12.4 million.
The number of those reaching the grand old age of 100, our centenarians, has increased by 13,120, since 1952. The Queen has sent about 110,000 telegrams and messages to centenarians during her reign.
Pensions minister Steve Webb said: "In the past 60 years we have seen man land on the moon, the fall of the Berlin Wall and the rise of the Internet and digital technology. Pensioners now make up 20% of the population and make a huge contribution to society." However, Mr Webb said the state pension age had not kept up with the changes and the current pension has trapped millions of people in "means-testing maw" for decades.
The government is set to bring forward the state pension age to 67 by 2028 and create a single-tier pension, estimated to be about £140 per week.
The DWP said a boy born in 1952 was expected to live to 78 and a girl to 83. A boy born in 2012 is expected to live to 91 and a girl to 94.
And while the Queen and the Duke of Edinburgh continue their busy schedule of Royal engagements, very few people are reported as employed at aged 86 or over.
About 350,000 women aged 65 or over are in work today and some 540,000 men aged 65 or over
Should you delay taking your state pension?
This year, 330,000 people are projected by the Department of Work and Pensions (DWP) to qualify for their state pension in the UK. For many, particularly women, it cannot come soon enough. The equalisation of the state pension age (age 65 for men and women by November 2018) means that many women in their 60s are waiting years for their pensions. Only 80,000 women will get their pension this year compared to 250,000 men. However, there are surprisingly large numbers of people of pension age who choose not to claim their state pension when it becomes due, so that they can draw a bigger pension later.
If you are in good health and expect to live for long enough to recoup the difference, then this is a piece of retirement planning that may be of interest to you. Those of you who reached retirement age before April 2016 are the big winners.
The state pension increases by 1 per cent for every five weeks the pension is deferred. This works out at 10.4 per cent for a full year. By doing so, someone entitled to the full basic state pension before April 2016 of £125.95 per week (or £6,549.40 per year) can increase their pension by £681 per year. Alternatively, they could get a one-off lump sum payment by deferring for at least 12 months in a row. This will include interest of 2 per cent above the Bank of England base rate — currently 0.75 per cent. Even if the pension is deferred for several years, the lump sum, which is taxable as income, will not push the pensioner into a higher rate of tax. A basic rate taxpayer will pay this rate even if the lump sum takes their income into the higher rate tax bracket. People qualifying for the state pension after April 2016 get a lower rate of annual increase for deferment of 5.8 per cent, but this is on a larger state pension.
Newly qualifying pensioners can get up to £164.35 a week — up to £8,546 per year — depending upon their history of national insurance contributions. Those qualifying for the full amount who defer for one year will see their annual state pension increase to £173.89 per week, or £9,041.88 per year — an extra £493.
What is the payback period? If you reached state pension age before April 6th 2016, deferring your state pension for a year only really pays off after around nine or 10 years of receiving your pension. If you reached state pension age after April 6th 2016, the payback period is around 17 years. This is a significant risk. The DWP says that the calculations are made more complex because the extra pension you earn from deferring is uprated each April in a different way from the rest of the state pension. Statistically speaking, the risk of not getting your money back and more, is lowest for those living in London and the Southeast, and the highest in some areas of Scotland such as Glasgow. The DWP says about 1.1m people are getting extra state pension as a result of having deferred their entitlement — about 8 per cent of state pensioners. This is not surprising as 1.5m people work beyond state pension age.
Who should consider deferring? You should only consider deferring the state pension if you are in good health, and do not need the money from the state pension now. It is most attractive for people who are still working or who have retirement income from a company or private pension which means the state pension would take them into a higher tax band. If your pension is in flexi-access you can turn the income off or on accordingly. The 21 per cent growth in self-employment since 2000 has been fuelled by the over-50s, who account for 43 per cent of the people who start their own businesses, according to the Office for National Statistics. By the age of 70, almost 60 per cent of those still in work are self-employed.
You should think carefully before deferring if you are receiving benefits, such as carer's allowance, income support or widow's allowance as you can't get extra state pension if you received these benefits. Deferring can also affect how much you can get in benefits.
What else do I need to do? Four months before you reach state pension age, you should receive a letter and a booklet from the DWP telling you how to claim. That is the time to do the maths and seek advice about whether deferment is worth considering for your own personal circumstances. Speak to an independent pension adviser. The over-50s can also make use of the government's free Pension Wise service although this is guidance rather than advice and can be somewhat generic. If you want to defer, you don't have to do anything. Your pension will automatically be deferred until you claim it.
Worried? You should meet Fred.
When markets are misbehaving, as they currently are, it can be a useful exercise to take a step back and remind ourselves of the bigger picture. While the headlines will always focus on the issue of the moment; what matters more to us than the exact outcome of Brexit or Donald Trump's next tweet is the quality of the assets we own and how we deal with the inevitable tough periods. To illustrate how we think about this, let's meet Fred.
(For those readers just looking for the conclusions, you can jump ahead to our checklist)
Fred retired in October 2017 after 50 years of working. A decade before his retirement, he had £100,000 in savings and after much deliberation with his adviser, he decided to invest into the stock market. Unfortunately for Fred, his timing was not the best as he chose to invest his money on 12th October 2007. This was the day global markets began falling, and the start of what would become the global financial crisis; and thus, one of the worst days to have bought shares in living memory!
A year later, the papers were declaring “Market crash shakes world” and Fred's portfolio was down a third to just under £67,000. Understandably, Fred was worried and rang up his adviser to ask what to do. Fortunately, for Fred, he had a good adviser who reassured him that he owned good quality stocks and that he should stick to his original plan of investing for the long term and his retirement. Fred agreed to leave his portfolio invested and the adviser promised to keep a close eye on his holdings.
So how did Fred do in end? Well when Fred liquidated his portfolio as planned in October 2017, he was very glad that he hadn't sold nine years previous crystallising that loss of £33,000. When he came to sell his shares, they returned approximately 144% equivalent to an annual growth rate of 9.3%. Not bad for an unfortunate piece of timing. Even after Fred had paid his fees, he would have walked away with comfortably more than £200,000.
So did Fred get lucky or was his patience prudent? Let's look at how Fred would have fared with his strategy in the other big stock market declines of the last 50 years:
Now Fred's strategy of patience isn't perfect by itself. The strategy only broke even, for example, when investors were hit twice within a decade - with the Dot Com bubble bursting and the global financial crisis unfolding some seven years later. It does, however, have a fairly impressive track record when you think that these were the four worst points to have invested in stock markets over the last 50 years. If you then supplement Fred's patience with a level headed investment manager who avoids pockets of extreme overvaluation, as we saw in technology stocks in 1999, then you have an investment strategy that has a fighting chance in all four of these scenarios of producing good returns.
Well, we know that patient investors who own sensible, diverse assets and who have managers they trust, have come through thick and thin before. What we don't know (and we'll let you in on an industry secret, nobody really does for sure) is whether the current turmoil will turn out to be another 2008 or just a natural correction in this bull market.
So if you are concerned then go through our checklist below:
Are you comfortable that you own a diverse set of quality assets?
Do you trust your investment adviser or manager and understand the advice they are giving you?
Do you have time to wait through a possible downturn?*
*How long do I need?
All investments that experience capital value volatility need investors to have enough time to allow the highs and the lows to average out and so have a good chance of achieving a positive return. While there are no hard and fast rules for how long is enough for traditional portfolios of shares and bonds, below are the minimum holding periods we recommend for clients. It is of course important to remember that nothing that hinges on the future as much as investing does, can ever be guaranteed and so is just one aspect of the process of working out whether an investment is right for you.
If the answer to each of the three questions is yes, then you can follow Fred's lead and look past whatever the current noise is.
If you are not sure then perhaps you should speak to your adviser...
RISK WARNING: The value of investments and the income derived from them may go down as well as up and you may not receive back all the money which you invested. Any information relating to past performance of an investment service is not a guide to future performance. Fluctuations in the rate of exchange may have an adverse effect on the value, price or income of non-sterling denominated investments.
Source: Robert Tannahill, Ravenscroft Group
Budget 2018 statement, Monday 29 October
The Chancellor has laid out details signalling the end to austerity in a statement delivered between key meetings in the Brexit negotiations. There's also good news if you have an unmaintained pot-hole in your road.
Despite many rumours surrounding pensions before the budget, mercifully, there were no changes materially impacting individual pension planning. There were however several items affecting the overall pensions and investment landscape, summarised below.
Reassuringly, there are no changes to pension annual allowances (AA). The standard AA remains at £40,000, the money purchase AA stays at £4,000 (with no carry forward) and there are no changes to the high income AA taper rules.
Other main points for pensions and savings:
Stay vigilant but calm
Global equity markets had a meaningful wobble last week. At Friday's close, the FTSE 100 was down 6.7% and the MSCI All Country World Index was down 6.4% (it was down 7.8% on Thursday's close). But we're reluctant to read too much into this particular bout of volatility as it didn't obviously result from either economic or geopolitical news. We have had several pullbacks in the past 10 years since the financial crisis - all have been in some way justifiable and have left investors feeling bruised and nervous. But markets by their nature settle down to find an equilibrium where the positive and negative forces are back in balance, and this normally happens quite quickly. Therefore, it is important not to lose the medium-term perspective.
Most commentators remained somewhat baffled that this time it had been positively surprising US economic data that appeared to have caused the trend reversal. In quarter two, the US economy grew strongly at an annualised rate of 4.2%. Consequentially, the search for other culprits was in full swing all week. Slowing demand from China, Trump's path towards an exploding US budget deficit – which makes even Italy look fiscally responsible – as well as the looming trade wars with China were all put forward as reasons why the 2018 US equity market rally had suddenly hit the buffers.
Unfortunately, as is usually the case, the stock market downdraft is highly contagious and so stock markets around the world were caught in the spiral. Given the other industrialised regions around the world are still operating far earlier in the economic cycle with still far lower rates of interest, bond yields and equity valuations, the $1million question is whether this sell-off will herald a change in market leadership away from the US, where growth may still be strong but also turning over.
Although unusual, falls like this do happen from time to time. In fact, this risk is largely the reason that clients are rewarded over the long-term for holding equities and investing in markets more generally. We're keeping a close eye on markets and, although we don't have a crystal ball, we don't believe this is the start of a wider market sell-off. After all, the initial reason for the sell-off was actually good economic news, not bad (it's true the US/China trade dispute rumbles on in the background, but there has been no specific new news this month).
Whilst we can't control what markets do in the short-term, we can control what makes it into client portfolios, and in this respect, we are satisfied with what clients are invested in, both from an asset class and from a fund manager perspective. Pension planning, by its very nature is long term and our aim is to promote growth to support an income. Our portfolios are not completely immune from market falls, but they are very diversified which has certainly helped.
Sources: Fidelity, Brewin Dolphin, J P Morgan, PortfolioMetrix
The South Coast of England dominates the top places to live in.
West Sussex is still the best place to retire offering pensioners the highest quality of life, reveals Prudential's 2018 Retirement Quality of Life Index. For a second year running the county has been awarded the top spot of any in England and Wales, beating Dorset which came in second position, East Sussex in third, the Isle of Wight in fourth with Norfolk in fifth.
My personal favourite, Devon, comes only sixth which I find hard to believe – we have two fantastic coastlines to choose from, two moorland National Parks, Plymouth and Exeter - two of Britain's most historic and vibrant cities, stunning rural scenery, pasties, cider, cream teas, what's not to like?
Actually, the analysis is based upon other key indicators of happiness and comfort such as access to healthcare, crime levels, pensioner migrants, pension income levels and how proactive the population is in pursuing a healthy lifestyle. The pasties and cream teas will be a negative factor then!
The West Midlands was ranked as one of the safer counties for retirees boasting the lowest crime rate per 1000 people, followed by North Yorkshire and Dyfed.
Retirees in Bedfordshire are now the wealthiest, with the best score for pensioner income, knocking Surrey off the top spot and followed by Essex and Hertfordshire.
If nice weather makes you happy, then Essex for the second year running, is the county boasting the best weather considering the annual hours of sunshine, days of rainfall and days of frost, followed by Dorset and Kent.
Over 65's in Herefordshire can look forward to their retirement in the knowledge that they were the best performing county for disability-free life expectancy with people aged 65 years old in the county expected to live 13 years on average, followed by Rutland (12.6 years) and Worcestershire (12.4 years). Those in Gwynedd, on the other hand, enjoy the best score for the number of healthcare workers per 1,000 people, followed by Shropshire and Bristol.
Dorset, for the second year running, was the county with the highest proportion of population over 65 years - accounting for over a quarter (28%) of the county's residents. In terms of the net flow (those moving in and out of a county) of over 65-year olds, Devon has the highest retention rate. Well I suppose it is a long way to go to get to anywhere else.
There are 12 million over 65s in England and Wales up by 1.4 million in 2017. Choosing where to live in retirement is an important decision and one that is often made many years beforehand as an aspiration or goal. To get the most choice when the time comes to give up work, people will benefit from saving as much as they can into pension, as early as they can in their working lives. Before taking any decisions on how to turn pension savings into an income, retirees should consider having a conversation with a professional financial adviser.
Budget day brought forward
This year's Budget is to be earlier than usual to avoid clashing with the final stage of Brexit negotiations in November.
The date of the Budget, Monday 29 October, also fits in with ministers' availability and official data releases, a Treasury spokesman said.
The Budget will also be a week after a high profile Brussels Brexit summit. Mr Hammond gave the date in a tweet, saying the government's approach to the economy was "getting debt falling".
The event will be three weeks earlier than last year and will come after a meeting of EU leaders on 18 October in Brussels, described by European Council President Donald Tusk as the "moment of truth" for reaching a deal.
Mr Tusk has also said that "if the conditions are there" an additional summit would be held in November to "formalise" a Brexit deal.
Source: BBC News
The French flag and why you should save for your retirement
Throughout our working lives, most people are typically involved in 3 basic activities. We are either working, enjoying leisure time, or are simply asleep (this includes time spent sat in a traffic jam, which could be all three!)
If life was represented by the French tricolour, the blue segment, work, generates the income for the other two sectors, white and red.
Leisure time and sleep time needs to be financed. Even during the hours of slumber, most of us are still consuming by using electricity and all the other household running costs etc. We all understand the importance of ‘earning a living' which determines our ‘standard of living'.
At retirement, work stops and is replaced by more leisure time (and perhaps some more sleeping), and therefore more even more opportunity to spend and consume. Retirees tell me that every day is like the weekend!
In tricolour terms the impact of the change is very apparent:
As you can see, retirement is a drain on personal resources, especially if you want to make the most of your new found free time.
If you have aspirations to retire at say, age 60, and don't have a personal pension or source of retirement income, then you will have a long wait until your state pension kicks in to replenish your work place income.
The alternative, of course, is to make sure you have stashed away enough of your hard earned income throughout your working life, by way of savings in a pension for example – this is a sensible way to plan to maintain your lifestyle in your twilight years.
Research the Office for National Statistics (ONS) suggests that there are still lessons to be learned about pensions. Auto enrolment has been hailed a success with over nine million people now enrolled in a workplace pension scheme. However, insights from the recently published ONS Wealth and Assets survey show much more needs to be done if we're to crack the retirement saving challenge, with figures pointing to a huge lack of awareness around auto enrolment and pension saving in general.
According to the survey, only 63% of eligible employees were aware they had been auto enrolled into a workplace pension; of those employees who said they had not been auto enrolled, 91% of them actually had been! Not surprisingly, only 42% of non-retired respondents said they knew enough about pensions to make decisions around saving for retirement. The research showed that people had different views on what they thought was the safest way to save for retirement. Almost one third would choose property investments as their preferred ‘safe' way to plan for their future.
At a basic level many people don't understand how pension schemes work. For instance, they don't know how pension tax relief, employer contributions and appropriate investment strategies can boost the amount being saved into a pension over time. Addressing these issues could help people get over much of their mistrust about pensions.
In addition, as auto enrolment minimum contribution levels go up over time, people will still need to save much more than these minimum levels if they want to generate a big enough pension to give them a decent income in retirement.
On a more individual level, financial advisers can also help people get past the barriers to starting pension saving. The ONS statistics show the reasons people give for not contributing to a pension scheme. These include: a lack of trust around pension schemes, affordability, a lack of knowledge.
Financial advisers can help challenge many of the myths around these areas and help people feel more comfortable making retirement decisions. Where people prefer to use different savings vehicles – for instance property or ISAs - advisers can play an important role in making sure people understand how these work to see if that product truly meets their needs.
Statistics like these highlight the many challenges people face when it comes to dealing with pensions and also show the importance of how a good financial adviser can really make a difference and help people plan for their retirement.
C'est la vie
Source: ONS Wealth and Assets Survey August 2018; DWP Auto Enrolment Review 2017
Lifetime allowance: Three types of at-risk employee and how to help
LTA tax collected in 2016/17 hit £110m
Vicky McKeever of Professional Adviser writes:
Pension savers breaching the lifetime allowance (LTA) today are shelling out 10 times as much tax as they did in 2006 when the policy was first introduced. Here, Wealth at Work outlines three types of employee at risk of breaking the rules...
The latest figures found that some £110m in tax was collected from individuals exceeding the allowance in 2016/17, up from less than £10m in 2006. Wealth at Work, a provider of financial education and guidance in the workplace, said taxpayers breaching the LTA typically fell into one of three categories.
In the first instance, the business said many employees may be "blissfully unaware" their pension pot is valued at or above the current LTA limit of £1.03m. It said this could particularly affect those who never check their pension value, or have not done so for some time. In fact, it pointed out many employees in defined benefit (DB) pension schemes are unaware their pot is valued at 20 times their annual pension for LTA purposes. An annual pension of £30,000 would, therefore, have a value of £600,000.
If they then decided to take advantage of pension freedoms and transfer said DB scheme, the transfer value could be as high as 40 times the annual pension. In this example, an annual pension of £30,000 could have a transfer value of £1.2m and therefore exceed the LTA, it explained.
Those who mistakenly think they are a long way off from breaching the LTA was a second scenario put forward by the firm. It said this was a danger, in particular, for employees making healthy contributions into their scheme and perhaps receiving matching contributions. Positive pension fund growth, as well as a pay rise may easily push them over the LTA before they knew it, the business warned.
For example, someone aged 45 could have a pension fund of £400,000 and a salary of £50,000, saving 5% of their salary into their pension, rising by 3% per annum. If they then received employer contributions of 10%, rising by 3% per annum, it is possible for their pension fund to reach £1,670,000 by the time they retire at 65.
Thirdly, employees who have taken protection measures and opted out of their workplace pension scheme to safeguard their savings from an LTA charge could still be at risk due to auto-enrolment regulations stipulating workers must be re-enrolled every three years.
One month's contributions could invalidate a previously applied for protection without employees realising, Wealth at Work said.
To avoid or reduce the impact of the LTA, the adviser suggested employees should reassess their current situation, including their pension pot valuation and how much has been accumulated via multiple pots. Employees could also consider alternative tax-efficient savings vehicles, it said, such as an ISA or workplace share schemes.
Director Jonathan Watts-Lay said: "Reaching the LTA could be closer than many employees think. For example, they may have a number of pension schemes that when combined with their current pension provision, could exceed the allowance. The tax implications could be drastic and could lead to potentially many being hit with unexpected and sometimes unnecessary tax bills."
Source: Article written by Vicky McKeever of Professional Adviser and reproduced here by their kind permission.
Don't Be Scammed!
Very pleased to see that the Financial Conduct authority (FCA), has launched a new Scamsmart campaign with The Pensions Regulator (TPR) to raise awareness of pension scams and urging the public to be cautious when approached about their pension. Scams are increasingly sophisticated and pension savers can be targeted by highly sophisticated scammers who steal on average, £91,000 per scam. Victims can lose their life savings and be left with limited income when nearing retirement.
The group most at risk is pension holders aged 45-65. New research shows that a third do not know how to check whether they are speaking with a legitimate pensions provider or adviser. Research has also revealed that 1 in 8 pension holders aged 45-65 are likely to trust an offer of a 'free pension review' – a tactic frequently used by scammers to lure pension savers into a scam.
The FCA reviews and assesses all reports received about unauthorised pension activities which are very often linked to these types of pension scams. This year the Unauthorised Business Department commenced proceedings against 2 unregulated pension introducers involved in the transfer of at least £86 million in pension assets from over 2000 consumers. The FCA is seeking injunctions, declarations and restitution orders to prevent further breaches in schemes which were unlawfully promoted to the public using false, misleading and deceptive statements.
The new campaign urges consumers to be ScamSmart and to check they are dealing with an authorised firm if they are considering changing their pension arrangements.
The campaign launched on 14 August 2018 with TV, radio and online advertising. See https://www.fca.org.uk/scamsmart/how-avoid-investment-scams for further help and guidance.
Our message: Fraudsters can be articulate and financially knowledgeable so make sure you know who you are dealing with. Never give out your bank details, PIN or password to anyone that you don't know. If the deal sounds too good to be true, it probably is! Take time out to refer to a trusted friend or relative before making important financial decisions. If you are suspicious, please report it. You can check the credentials of an individual adviser or adviser firm on the FCA's register - https://register.fca.org.uk/
The silly season is in full swing and is commonly referred to as the slow news season. This is when news stories slow down and many news editors take their annual holidays. Journalists are looking around for newsworthy stories and trivial events that wouldn't normally attract any coverage at all, but they suddenly become hot topics, even front-page news, for want of an alternative.
Now however, one of Britain's great institutions seems to be under threat. Thanks to the seemingly endless machinations of Brexit, politicians, and the efforts of President Trump to offend everyone except a small group of former steel workers in Ohio, the silly season has come under intense pressure from actual news. With the notable exception of a story about the possibility of Great White Sharks patrolling the waters off Cornwall “in the next 30 years” the press has been parched of genuinely silly stories in recent weeks.
The financial press is no different and I see that rumours are circulating ahead of the autumn budget that flat rate tax-relief on pensions may be back on the agenda. It is probably more than two years since the subject of flat-rate tax relief on pension contributions seriously reared its head, but the Treasury Select Committee has put the topic very much back on the table in its report on Household Finances published on 26 July.
A change to tax relief is portrayed as a means of incentivising the majority to save for retirement, rather than just higher and additional rate taxpayers. With 52% of all relief paid going to individuals earning more than £50,000, it is difficult to challenge the thinking behind a fairer distribution. From the Government's point of view, a change to say, a flat rate of 25% for all, would raise another £4bn a year in revenue for the Treasury. The practicalities of delivering any changes may cause headaches for pension scheme administrators especially where employers make contributions, however I do not believe that they are insurmountable.
With the rumoured flat-rate relief back on the radar, any higher or additional rate tax-payers who are contemplating making further ad-hoc contributions to their pension pots, may wish to think about the possibility of missing out on higher rate tax relief if they delay their decision to post-budget.
Why are so many of us not saving for a rainy day?
As a City regulator starts an inquiry into ultra-low savings rates, concern grows that Britain is losing the "savings culture". Can the regulator really protect us from our own folly? The Financial Conduct Authority (FCA) is suggesting a basic savings rate (BSR) and under its proposals banks and building societies would have to set a basic minimum interest rate across all their accounts. The intervention is about limiting the worst deals, not about getting the best from your savings.
A 2015 study by the FCA found that there was £108bn held in easy access cash ISAs, one in five of which had been opened more than five years ago. These loyal customers were getting 0.87% of a percentage point lower than the most recent customers. The same report found £354bn in easy access savings accounts and again long-standing customers are getting a poor deal when compared with new customers. With many of us saving with the same organisation that holds our current account, are we too loyal to them or just too lazy to shop around and transfer? With rates so miserly is there any point anyway?
The problem with savings is more deep-rooted though.
After 10 years of low interest rates (which has been welcomed by borrowers), is it any wonder that people have fallen out of love with the idea of putting something aside each month? Savings aren't just about the interest rates though. It is prudent to build a cash reserve to cover those unexpected emergencies such as a large car repair bill. However, I also think that several decades of poor, or non-existent financial education in schools for young people, coupled with a general lack of parental guidance and ignorance has added to the malaise. After years of pressure on wage rises, many families are struggling to make ends meet and will cite this as a reason not to save.
I do believe that more of us could get by just fine, even during so called austerity - trouble is we have unlearnt the art of making good choices and prioritising. Funny how so many seem to be able to afford tattoos, piercings, take-aways, pets, Sky TV, smoking, drinking, all the essentials, yet still plead poverty! Frivolous or just enjoying life? Each to their own I suppose.
Fortunately, the workplace pension (auto-enrolment) has proved far more popular than the Government first envisaged, with more than 8m people signed up (July 2017) for a workplace pension since it was launched in 2012. This means that millions more will be able to look forward to a more financially secure retirement. We mustn't get carried away though, auto-enrolment has got off to a great start but contributions are for low amounts, it is not the panacea and there is still more to be done. It probably won't be enough to live on comfortably and neither will the State pension.
Commentators estimate that BSR could be worth a total of £300m a year in extra interest paid to savers. However, some are fearful of the so-called water-bed effect where pushing up interest rates for some accounts causes them to be cut elsewhere in order for the banks to balance their costs. We will have to wait and see how this pans out. As ever, anyone who wants to grow their hard-earned cash must stay vigilant, study best buy tables and be willing to switch regularly.
The Bank of England interest rate decision will be revealed this Thursday on 2 August, with a rate rise from current 0.5% to 0.75% expected. Maybe this will be the start of a longer-term trend and be a welcome tonic for savers regardless of what the FCA do.
Not married but in a relationship? Good news if your partner has a pension
A heterosexual couple have won their legal bid for the right to have a civil partnership instead of a marriage. In a civil partnership, a couple is entitled to the same legal treatment in terms of inheritance, tax, pensions and next-of-kin arrangements just like in marriage; in other words, legal and financial protection for both parties in the event of the relationship ending - as in marriage.
There has been pressure building for the Government to review the law that currently only applies to homosexual couples and thus end the discrimination for lack of formal recognition of their relationship. It is an irony that the way in which relationship equality for same sex couples came about in the 21st century had the effect of creating inequality between them and different sex couples. Was it ever fair that same-sex couples had two options, civil partnerships and civil marriages, whereas opposite-sex partners had only one option, marriage?
The ruling will be important for male and female couples who do not want to get married, but who opt for a civil partnership instead. Both partners should now benefit from the same rights as if they were married. In practice this means that the death benefits from a final salary pension for example can now pass to the other partner, whereas under current ‘co-habiting' rules, often the surviving partner would not be entitled to this. If they were legally married, or in a same-sex civil partnership though, then they would be. Other advantages of this ruling will be the resolving of issues regarding lack of certainty around next of kin and inheritance. Couples also stand to gain from things like tax allowances.
The judgement does not oblige the Government to change the law, although it does make it more likely that it will act upon it according to the BBC.
There are 3.3m co-habiting couples in the UK and maybe the law is finally catching up with the reality of family life in Britain in 2018.
Time to simplify ISAs
I wrote back in April about the demise of the traditional Individual Savings Account (ISA) season in the lead up to the new tax year. Is it because ISAs have become over-complicated – like pensions? This has become an emerging theme over the last few years. Cash ISAs have fallen out of favour as interest rates have remained low and banks and building societies have trimmed back their competitiveness that they once offered on ISAs. Add to this the tax rule changes in April 2016 where basic rate tax payers are able to earn up to £1,000 in savings income tax-free, and higher rate tax payers £500, the tax efficient status of a Cash ISA is less appealing. Stock and Share ISAs remain a useful vehicle for longer term savings as there is no capital gains tax to pay, returns and any income taken is tax free and they have the potential for greater growth than ordinary deposits.
ISAs were once a very simple concept to grasp and served not only as a tax efficient way in which to save but they actually encouraged personal savings – just as they were designed to do. New rules have brought in unconventional new forms such as the Innovative Finance ISA, Help to Buy ISA and Lifetime ISA. Whilst these new ISA types mean more options for investors, as we've seen with pensions, an increasing ‘complexification' could lead to fewer people saving and investing tax-free for their future. This is not in the interest of Government if it ends up footing the retirement funding bill, nor is it in the interest of individuals if they suffer a lower quality in later years as a result. Take up for the new ‘house-purchase' related ISAs is low and they are not exactly catching the public's imagination just yet.
We need to get ISAs back on a simpler footing, not least in respect of the Lifetime ISA. The Lifetime ISA is a peculiar hybrid cross between an ISA, a pension and a home savings product. Up until 2017, when the Lifetime ISA was introduced, there was a simple choice between saving in an ISA and saving in a pension. When it comes to financial advice and planning, it is never a good idea to try to merge two (or even three) products with the aim of meeting one objective. Older readers will remember how back in the 1980s, pension mortgages were all the rage for a few years. Hindsight has shown that it was a struggle for some investment vehicles to grow enough to repay the mortgage, let alone have anything left in the coffers to provide for a pension as well.
For younger savers, their future planning priorities can be a complex decision making process and this is a concern because it increases the danger of them making a choice they might later come to regret. The help of a trusted independent Financial Adviser is recommended.
Part of the problem with the Lifetime ISA is that that there is a penalty of 25% if you want your money out before age 60 or if you aren't buying your first home. If the Government is serious about encouraging savings then there should be no penalties for tax-incentivised savings. Currently, you can invest £4,000 maximum per annum – but is this enough - perhaps it should be brought into line within the overall £20,000 limit offered on other types of ISAs?
Either way, a thorough overhaul of ISA products is long overdue so that we can get the ISA back to the simple product that made it successful in the first place.
Child Benefit and State Pensions – how are they connected?
Child benefit and the State pension both have to be ‘claimed' in order to receive them – neither are paid automatically – and both have eligibility conditions. Eligibility for the State pension depends on having paid, or been credited with, National Insurance contributions – 35 years of contributions for the full rate. And that's another connection. One way to be ‘credited' is to be entitled to receive child benefit for a child aged under 12.
Midwives give new parents a form to claim child benefit. So why wouldn't a new parent fill it in – lack of sleep, too many nappies to change – or perhaps because they'll not only have to pay it all back, but also complete a self-assessment tax return.
Since 2013, child benefit has been taxed (the high income child benefit tax charge) where at least one partner's adjusted net income exceeds £50,000. If a partner earns more than £60,000, then the entire benefit has to be repaid as tax. People subject to the high income child benefit tax charge must complete a self-assessment tax return. So wouldn't claiming child benefit just mean lots of hassle for no gain?
Not necessarily, as the House of Commons Treasury Select Committee has pointed out in a letter to the Government. They question whether it is being made clear enough to potential claimants that not claiming child benefit means that they won't be credited with contributions towards their State pension.
The Committee raised this concern over seven years ago when taxing child benefit was first mooted. The Government responded by enabling credits to continue to be provided if a person opted out of receiving child benefit. However, this provision does not extend to people who never claim the benefit in the first place. Although it is possible to both claim and opt-out of child benefit at the same time – perhaps people don't have the perseverance to reach question 68 of the child benefit form to find that out!
But that could be a costly mistake. The new State pension, which is paid to those reaching State pension age after 6 April 2016, has no spouses'/civil partners' element. Furthermore, there were no transitional protections for dependants' pensions already accrued unless the contributor was already in receipt of their State pension – the dependants' pensions just vanished. In the post-2016 world, spouses and civil partners have to make their own provision – and claiming child benefit is a step on that road.
As part of your future retirement planning, it's always worth keeping a check on how much State pension you will be entitled to – you can do this anytime at https://www.gov.uk/check-state-pension
Never mind student debt – what about over 65s debt?
Over 65s debt on track to hit £86bn by the end of 2018
Over 65s will have amassed a record £86bn of debt in 2018, up from £78 billion in 2017, according to research from the Centre for Economics and Business Research commissioned by more 2 life.
The research found that the average total debt held by 65 to 74-year olds in 2017 was also higher than expected, hitting £15,700 instead of the predicted £12,500. This is estimated to increase to £17,100 in 2018.
Worryingly, in 2018, the average mortgage debt of those aged 65 and over is estimated to stand at £86,000, which is 13% higher than in 2013.
Somehow, I don't see that generation throwing caution to the wind and running up debts to fund a lavish and flamboyant lifestyle. So what's going on?
The industry calls it the ‘retirement lending market' and it is growing faster than previously expected. This is probably exacerbated by an ageing population who are buying houses at a much later stage and shrinking pension pots resulting in low retirement incomes. A divorce lawyer friend of mine has told me that the fastest growing age group for marriage break ups are for people in their 50s; he suspects that the kindling of old flames via social media such as Facebook could be fuelling this phenomena. This often means that where two people previously lived in one house, after the split, two properties are needed and consequently so is the finance to purchase them.
Of course, longevity means that a growing number of older people are having to make important decisions about how to manage their wealth over a longer period than previous generations, presenting new challenges along the way. As I have previously commented, the Bank of Mum and Dad is a significant lender in the UK and it's not all coming from savings.
Among the growing numbers of older people carrying secured and unsecured debt into retirement, some may be doing so as part of a deliberate asset management strategy, but worryingly, the research indicates that a significant minority are doing so to help manage cash flow problems and make ends meet. Products like equity release have the potential to play a hugely important role, relieving budgetary strain and offering more financial freedom. Equity release loans allow older people to get their hands on tax free cash sums without having to make monthly repayments. Instead, the advance, and the interest accrued is paid off when the homeowner dies and the property is sold. There has been criticism in some quarters about the cost of such loans, sometimes as high as 6%, so they're not for everyone and should be treated with caution. Proper advice should be taken before proceeding.
Inflation measures – Leggings in, pork pies out, as the latest changes to the inflation basket are revealed
The traditional measure of inflation in the UK for many years was the Retail Price Index (RPI), which was first calculated in the early 20th century to evaluate the extent to which workers were affected by price changes during the First World War. It has existed in various forms since then, and more recently, a further measure has been introduced called the Consumer Price Index (CPI). CPI excludes housing costs and mortgage interest payments, and unlike RPI, CPI is calculated on a formula that takes into account that when prices rise, some people will switch to lower priced alternatives.
Whatever its format, the basket of goods and services chosen is intended to reflect changes in society's buying habits and the price movements of 700 goods and services are measured in 20,000 UK outlets to calculate inflation. It is interesting to note what is, and what is not, currently in vogue, it is certainly an eclectic list!.
For example, in 2009, rosè wine and takeaway chicken were added to the basket, whereas volume bottled cider and boxes of wine were removed.
This year, women's leggings and mashed potato will now be used instead of pork pies and lager sold in nightclubs to help calculate the cost of living in the UK.
The changes are part of the Office for National Statistics' (ONS) annual review of the basket of goods used to measure the UK's inflation rate. Quiche, action cameras and soft play sessions have also been added – as have high chairs to represent nursery furniture, which has not been covered in the baskets since the removal of a cot in 1999.
So, this year, the exclusion of the humble pork pie is the result of rethinking the area of "cooked pastry-based savoury snacks", according to the ONS. The aim was to reflect the "widening collection across a range of takeaway outlets", rather than only pasties and pies in traditional fish and chip shops.
So why should we be concerned about inflation?
For your money to have the same spending power year on year, your income, regardless of whether it's from a pension or salary from paid work, needs to be at least the same as inflation. The same principle applies to savings interest if you wish to avoid erosion of the real value of your capital.
Pensions can be affected further depending on which index is used to calculate final payments. While state pensions use the CPI as a measure of inflation as part of the Government's triple lock guarantee that pensions will rise by at least 2.5% each year, many private pensions continue to use the RPI to track pensions.
However, if they were to change to CPI, this could see thousands of pensioners receiving lower pension payments than previously expected as their pension pot increase will be dramatically reduced.
One final thing to say on inflation is how it affects your own personal cost of living depends very much on what you spend your money on. So while inflation as measured by the CPI and RPI are useful indicators of the cost of living, yours may be higher or lower.
JPM Guide to the Markets - more volatility?
One of my colleagues attended JPM's guide to the markets event and here are some notes detailing their thoughts and comments about global markets. We thought it worth sharing their fascinating viewpoint. It appears they are not quite as bullish as they were in January.
Still think USA inflation and subsequent rate hikes could push USA into recession but overall still fairly constructive on equities but they have reduced their overweight
Expect to see more volatility in markets over next few days – Wall Street sold off last night and USA futures market is down this am too.
There is talk of lower than expected corporate earnings from some sectors and this is seen as a possible slowing down of USA economy.
There has been talk about the yield curve flattening or even inverting which is when short term interest rates start to rise.
The USA 10 Year Treasury Yield went up to 3% for the first time in 4 years which is also seen as bearish for equities.
All of these are signals of a potential USA recession but looks like this will be towards the latter end of 2019 and will depend very much on when / how.
The Fed increases base rates.
JPM said they had reduced their exposure to equities from a large overweight to a smaller overweight in favour of cash and structured bond funds.
They are long-term very constructive (which means they think prices will go up) on Emerging Markets and expect good growth to come from both China and India.
Of particular significance is the fact that Chinese A Shares will become part of MSCI World Index.
They expect China to grow to 45-50% of the MSCI World Index.
There was talk about the impact of the trade sanctions. 37.5 billion USD of trade sanctions is a big number but it is small in size compared to USA economy which is 19.7 trillion US$ and China which is 12.8 trillion US$ i.e. it is only 0.2% of Chinese GDP and market is oversold and should correct.
They think the biggest concern is inflationary pressures in USA market and the Fed putting up interest rates too quickly.
There has been some moderation in the Purchasing Managers Index survey figures (PMI) for manufacturing – but no warning of recession yet and numbers globally all above 50
Global unemployment rates all still falling
Markets expect rate hikes in USA throughout 2018 (2 likely in 2018 and 3 in 2019 … when they hit 3% this could cause recession in USA) .
The fiscal stimulus in USA from increased Government spending could stave off recession
In UK probably 50:50 whether they rise in May; Eurozone not expected until 2020
Whilst inflation picked up when sterling weakened post Brexit – it has now started to drop off quite quickly as the price if imported goods is now dropping with the strengthening of sterling
JPM not too bearish on Brexit. Their chief economist Karen Ward, was previously one of chief advisers to Philip Hammond at the Treasury and she is positive on Brexit especially for Financial Markets
She does not think Germany or Frankfurt want to be seen to be benefitting from Brexit as this would harm relations with the rest of Europe if Germany gets even stronger – so she thinks City of London is safe – (Perhaps she is talking her book!) Carney is now trying to back track on May hike but it is still possible. His term is supposed to end in March 2019. Could be replaced by Ben Broadbent ex Goldman man or an Ex Indian Central Banker is also in the running. JPM neutral on UK equities.
Emerging Markets they think China GDP will continue to grow at 6.8% year on year and expect it to drop to 5%
India should continue to grow at 7%
Expect further urbanisation and industrialisation in India especially
Average time spent in education in USA is 13.2 years, whereas it's 7.6 years in China and 6.3 years in India expect this trend to increase which is very positive for growth in both countries
Expect both countries to move up the value chain
China population expected to be 1.4 billion by 2050, India's population still growing rapidly and expected to grow by another 275 million by 2050
Overall they expect recession to come around 13 months after yield curve flattens but the dynamics of QE and QT are unknown and could impact on this as could the fiscal stimulus – Hedging their bets as normal!
Eurozone expect 2% growth in GDP and moderation of pace of growth – signs that unemployment is dropping and consumer confidence is growing which is positive for Eurozone equities
Expect Euro to strengthen – however the strengthening of Euro makes it harder for the manufacturing industries in Europe to continue to perform.
These notes are for information only and should not be construed as advice to invest (or not to invest) in any particular area.
Is there really an ISA season any more?
We had our usual busy end to the tax year with a flurry of last minute pension and ISA top-ups. However, the idea of an ISA season, with most ISA investments being crammed into February and March is probably a bit outdated now.
This is based not just on our own observations, but on what providers themselves tell us. One such survey by Octopus Investments conducted just after Christmas revealed that almost half of advisers - 48% - say they tend to do the bulk of their ISA planning with clients towards the beginning of the tax year. This makes good sense, the sooner one invests, the sooner one can benefit from the ISA tax reliefs.
The maximum investment is £20,000 and investment ISAs put capital at risk meaning investors may not get their full capital back. However, over the medium to long term, Investment ISAs offer the potential for greater returns when compared with ordinary deposits.
Have you reviewed your holdings recently? Don't forget that existing ISA portfolios can be easily consolidated into one simple plan without losing the tax efficient features.
2018 Spring Statement
With the move to one budget in 2018, the Spring Statement merely provided an economic update and saw the release of a number of consultation papers. None of these have had any direct impact on financial products or services. Chancellor Philip Hammond was in an upbeat and jovial mood though and predicted a bright future for the UK. He reported a higher growth forecast for 2018, and a fall in inflation, borrowing and debt.
He told MPs: "We have made solid progress towards building an economy that works for everyone."
Mr Hammond said the economy had grown every year since 2010, adding that the Office for Budget Responsibility had confirmed growth of 1.7% was achieved in 2017, higher than its 1.5% forecast in last autumn's Budget. The OBR also revised its growth forecast for 2018 up to 1.5% from 1.4%. One reason in the short term for the rise in economic growth is a robust global recovery. The stronger expansion in 2017 also meant the economy carried more of that momentum into 2018. While productivity growth over the last two quarters is the strongest since the 2008 recession, this is not expected to translate to higher growth in later years.
The Institute of Fiscal Studies is not so bullish and consider the British economy to be sluggish at best and reckon other economies around the world are doing a lot better than we are.
Still, optimism is a positive notion and some growth is better than no growth or recession. The UK economy is progressing and is back on a firmer footing compared with the dark days and chaos of 2008.
From an investment point of view, we remain cautious and advocate a diversified investment strategy until the full outcome of Brexit is known.
Asia – oh to be forever young
The developed world has a well-known ageing population problem.
Dependency ratios (the ratio of the young and very old to the working population) are rising and labour forces are projected to decline sharply across China, Korea and Taiwan (Figure 1, left-hand chart).
However, demographics are more favourable in other parts of Asia – for instance, in Bangladesh, Indonesia and India – and even more so in Africa, where the working age population of Nigeria alone is forecast to increase in size by around two thirds between 2015 and 2050 (Figure 1, right-hand chart).
However, despite these mixed demographic trends, a look under the bonnet suggests an altogether more positive story:
This receptiveness to new ways of doing things, largely a function of the demographic profile of Asia's middle class, will be crucial in shaping the future economic picture of the region.
These pro-youth trends are in stark contrast to the West, where the elderly have the best pensions, the highest disposable incomes and are asset-rich mainly as a result of the soaring value of their homes. In contrast, the young cannot get on the property ladder and are saddled with spiralling levels of university debt. Western youths may wield greater political impact (a notable example is the UK, where over 70% of under 24-year olds voting in the last General Election voted against the Conservatives, whose supporters included more than 60% of over-65-year-old voters) but they perceive themselves as second-class citizens in economic terms compared with their elders.
While youths in Hamburg want to throw rocks at G20 leaders, their Asian equivalents are embracing a world of choice with positivity and enthusiasm.
The Deloitte Millennial Survey 2017 found that emerging millennials (those born from 1982 to 2004) were more confident about their economic prospects and expected to be materially and emotionally better off than their parents.
Millennial wealth is projected to more than double between 2015 and 2020 to somewhere between $19 trillion and $24 trillion. To put this into perspective, US GDP is projected to be only $22 trillion at that date and the Eurozone economy $13 trillion. Chinese millennials are clearly a force to be reckoned with.
While ageing and fabulously wealthy Asian tycoons still feature largely in the popular imagination, the real economic influence in Asia is middle class and, crucially, young.
In many ways it's just a matter of attitude and expectation. These younger consumers today are typically teenagers and people in their early 20s, who have grown up in a period of relative abundance. Their parents, who lived through years of shortage, focused primarily on building economic security. But many young Chinese consumers were born after Deng Xiaoping's visit to the southern region—the beginning of a new era of economic reform and of China's opening up to the world. They are confident, independent minded, and determined to display that independence through their consumption.
Prone to regard expensive products as intrinsically better than less expensive ones, they are happy to try new things, such as personal digital gadgetry. Teenage family members also already have a big influence on decisions about family purchases, according to the research.
The same phenomenon is evident in India where by 2020 the average age of the population is expected to be just 29 (compared with China, 37). Recent survey data show that millennials' gross income is significantly higher on average than that of the older generation, and it is no accident that 57% of all working millennials in India are the chief wage earners in their families
The more obvious effects of this rising wealth is trading up by consumers. Asians have long had a love affair with luxury brands (Burberry, Louis Vuitton, Premier Cru etc) and are prepared to spend vast amounts to get them.
More sustainably, the Chinese are trading up in areas such as home appliances, fitted furniture, kitchen equipment and tourism. Importantly to us as investors, many of the beneficiaries of this trend are domestic brands accessible via A-shares, traded in the local Chinese equity market.
More interestingly, this is a generation which feels completely at home with technology and wants to embrace it. The level of engagement is staggering. It's not just the numbers – 963 million monthly active users on the WeChat/Weixin social media service or 340 million on the Sina Weibo microblogging service – but the breadth and depth of its level of engagement.
Inevitably the here and now is dominated by China. Once the political will was there, the rest followed given the advantages of scale, economic clout and homogeneity that China uniquely possesses. However, do not underestimate the speed of adoption in other Asian markets, where the basic conditions in terms of average wealth, youthful, open-minded populations and weak incumbency co-exist.
This is clear in Asia's adoption of the internet where the potential is still staggeringly large. The situation where Eastern Asia has almost 900 million internet users but only 55% penetration, or Southern Asia which has almost 500 million with under 30% penetration is only going to resolve itself one way.
Indeed, in Indonesia, a classic "difficult" market, it is already happening. The country boasts the third-largest Facebook user base in the world, with 40 million transactions a month going through the GO-JEK app, a transport service akin to Uber, while Alibaba and Tencent are pouring in the money.
So as investors, what are the lessons? Don't write off Asia based on the simple extrapolation of demographic trends. There is a massive shift of wealth going on and the beneficiaries are young, middle class, technologically savvy and open to change. In these circumstances, valuations still matter, while there will be many losers as well as winners from the rapid changes we are witnessing. Unsophisticated investment strategies are unlikely to be able to differentiate between the two.
However, active investment should continue to provide rewards as Asia becomes increasingly a leader rather than a follower in the application of genuine innovation. It's worth keeping an eye on this area.
If you run your own business, how do you take your profits - pension or dividends?
For owners of SME companies, choosing how you take your profits can be a tricky business. The argument in favour of pension contributions has been gaining momentum over the last 2 years.
Whilst taking dividends may still be popular, recent changes to how they are taxed are driving more directors who don't need the income for day to day living to extract profits using employer pension contributions instead. From this April, the annual dividend allowance will reduce from £5,000 to £2,000 meaning that higher rate taxpayers for example, could face a further tax bill of £975, increasing the focus on the pension alternative.
The dividend option still remains a better option than salary for most directors – even with these reductions. For a higher rate taxpayer, the combined effect of corporation tax at 19% and dividend tax of 32.5% will still yield a better outcome than paying it out as salary, which needs to account for income tax at 40% plus employer NI of 13.8% and employee NI of 2%.
However, a pension contribution remains the most tax efficient way of extracting profits from a limited company business. An employer pension contribution means there's no employer or employee NI liability - just like dividends. But as it comes off the bottom line, it means a lower corporation tax bill.
Under current pension legislation, those directors who are over 55 will be able to access it as easily as salary or dividend. With 25% of the pension fund available tax free, it can be very tax efficient. Furthermore, if the income from the balance can be taken within the basic rate tax threshold, this helps even more. Beware though, by doing this, the MPAA will be triggered, restricting future pension contributions to just £4,000pa.
With the tax year end approaching, there are several reasons why you may benefit from making an employer pension contribution now:
In addition to this, there will be many companies with a financial year in line with the tax year e.g. where the company business year ends on 31st March. These companies will not be able to confirm any final dividend until after this date. If these dividends are subsequently paid in 2018/19, they may use up next year's lower dividend allowance before the new company year has even started.
As with all things related to financial planning and tax, we recommend taking professional advice before acting.
Market commentary February 2018
Earlier in the week global markets went into reverse, triggering much speculation as to whether this heralds the end of the current bull run. Many investment experts point out that volatility has been unusually low since mid 2016 and a correction was long overdue. Here at Pension Drawdown, we have long shared the sentiment that some sort of a correction was imminent.
The urge to react to short-term market events can often be tempting to clients. Our key message is one you have heard many times before – volatility is a feature of long-term investing and it's time in the market that counts, not market timing. I suggest that just as was the case during previous market upsets, the best advice for investors is to ‘keep calm and carry on'. Unless this current rout morphs into a major and lasting liquidity crunch, for which there is little indication, then the upward direction of travel of the global economy and consequentially corporate earnings and dividends, set the longer-term course of investment returns.
Some commentators see this volatility as the greatest sign of real health in the markets for a long time. The tech-fuelled rally in the US had long lost any sense of reality in its valuations, the prospect of inflation remaining low forever could not last, and we have a new and untested Fed Chair. Furthermore, the correction is needed in order to quell recent US equity investor exuberance for a while longer. A 5-6% global stock market growth in a single month (without being a recovery from a previous fall) has just all the hallmarks of an overheating capital market environment which usually leads to nasty corrections.
After an exceptionally strong January in equity markets, which followed strong 2017 returns, stock markets around the world have now suffered a considerable downward correction without there having been any one particular trigger. Indeed, Monday night's 4.5% fall in the US coincided with macro-economic data releases showing both the US, as well as the European economies are in even better shape than previously anticipated. However, to give perspective, US markets still only fell back to where they were already at the beginning of the year.
Our investment portfolio strategies have, since late 2016, been more conservative than the upward momentum strength may have normally warranted. This means that our clients' portfolios are well diversified and have therefore shown good resilience in the face of these market headwinds. This means that our investors have experienced lower portfolio declines than if they were invested passively or in many instances, elsewhere. Where suitable, we are actively seeking to take advantage of potential buying opportunities as they arise. Our aim is to seek a balance between risk and reward.
What's in store for 2018
A few weeks into the New Year and before you know it you will be thinking about Valentine's Day, pancakes and Easter eggs.
One of the most significant dates in the calendar is 5 April which heralds the end of the tax year. For those of you who wish to make the most of your tax efficient allowances, this is your last chance to use your ISA allowance. You can invest up to £20,000 per person per tax year. Here are some other key dates in 2018 for you to be aware of…
This is more for the accounting side of your personal finances but we would encourage those of you who are self-employed to get organised sooner, rather than later as time is running out. This will mean that you should then avoid more financial stress and potentially a fine from HMRC. Plus the earlier this is out of the way, the more time you will have to focus on other, more interesting things.
A great opportunity for this part of South East Asia to put themselves in the shop window and for TV networks and social media to boost their revenues.
The exact date is yet to be set but draft legislation on banning cold-calling is expected to be published in the next few months. As the pension transfer market continues to grow, this new legislation is designed to protect vulnerable clients from scammers. It is expected that this will be extended to cover savings as well, good news for all but the criminals.
While we're likely to see more talk of Brexit costs in Chancellor Philip Hammond's speech, as negotiations continue to unfold, clients should listen out for changes to personal finance policy. Pension tax relief is always a speculated target, particularly as Mr Hammond resisted the temptation for any changes in the Autumn Budget.
Along with increases to the personal tax allowance, capital gains exemption threshold and Enterprise Investment Scheme allowance, the first bonuses on the Lifetime ISA are also due to be paid. What's more, the new full State pension increases to £164.35, while mandatory pension contributions via auto-enrolment increase to 5%, including the 2% employer minimum.
April 6 is also another opportunity to invest up to £20,000 into an ISA.
The bill calling for transitional arrangements for women born in the 1950s and affected by state pension changes from 1995 and 2011 legislation, is expected to go through its second reading in the House of Commons
Prince Harry is set to marry American actress Meghan Markle on Saturday 19 May.
Disappointingly, the Government has ruled out an extra bank holiday, nonetheless, the weekend wedding will likely mean street parties and a coming together of people. Additionally, the UK could benefit from a much welcome £1bn economic boost courtesy of the big day – according to the Mail Online.
Football fans will rejoice to hear 2018 is a World Cup year. The tournament will be held in Russia this time around. England, the only home nation to qualify are in Group G. Their first match is against Tunisia on 18 June, then Panama on 24 June, then Belgium on 28 June.
Depending on England's further progress, pubs and hostelries are set to benefit from televised matches. Although England have not won the World Cup since 1966, the event promises lots of excitement, passionate cheers, and plenty of pride among fans. Apologies to our Irish, Scots and Welsh clients but, come on England!
In November, the Government pledged it would release a social care green paper by summer 2018. It will set out how it will improve care and support for older people, as well as tackling an ageing population. Clients may be interested in the proposals in terms of how it will affect savings to accommodate for later life care.
Any guesswork on the Autumn Budget will only really loosely take shape following the outcome of the Spring Statement. Depending on what is outlined in the proposed summer green paper, however, care policy could be back on the agenda.
November - State pension age equalises at 65
From November, the state pension age will equalise for men and women at age 65. In the run-up to the changes, we're likely to hear more from the Women Against State Pension Inequality campaign. Again, depending on the outcome of the second reading of the women's transitional arrangements bill, if this does affect you, how financially prepared are you for the changes?
With best wishes for a peaceful and prosperous year.
How to be a mum and still get a decent pension
Stay at home mums – and dads, who give up work to look after a family are amongst those least likely to save for retirement.
Saving for retirement is simply not on the agenda, often because they have no income. So if you are a full-time parent, ask yourself this: could I survive on an annual income of £8,200 in retirement? That is roughly what the state pension currently pays out, if you have 35 years of National Insurance (NI) contributions behind you.
But if the answer to the above is "no", there are some practical things you can do to maximise any savings, however small they may be:
Firstly, it is worth remembering that even though you have been away from the workplace, your years as a parent still qualify towards your state pension. As long as you are registered for child benefit, and your youngest child is under 12, you will get National Insurance (NI) credits for the time at home.
But to qualify for the full state pension, you will still need to have 35 years NI credits in total by the time you retire. With less than 10 years of credits, you will get nothing at all.
Secondly, if you are back working, even part-time, and in a workplace pension scheme, experts suggest you should try and stay in it. In any case your employer will continue to make contributions into your fund for the duration of your maternity leave. That will be for at least 39 weeks, and in some cases more. If your workplace scheme is a group personal pension, you might also be able to continue making contributions into it, if you can afford to do so. Your employer will continue making contributions too.
If you are no longer earning, and you are not part of a company scheme, you still have options: you could open a private personal pension - basic rate taxpayers have their contributions into a pension boosted by 20% so someone putting £800 into a pension will have it topped up to £1000.
If, as a parent, you give up work, it has been suggested that your working partner might like to pay into a pension for you. There are limits as to what can be put in but some partners would be very open to it.
Whatever you do, don't delay, there are advantages for starting regular contributions early. The money in your pension pot doesn't just sit in a vault somewhere, gathering dust. Instead, it's invested. This means it has the potential to grow over time and the earlier you start your pension, the more time it has to do this.
Special rules apply to military wives and women taking time off to have children are typical beneficiaries. Such NI credits may be crucial for reaching the all important 35 years of NI payments to qualify for the full State Pension.
The NIC scheme for military personnel allows:
For more information on how spouses and civil partners of armed forces personnel posted overseas can fill gaps in their National Insurance record see: https://www.gov.uk.
Perhaps the only real solution is compulsory saving into a pension from a young age, or better information for parents-to-be. When women take maternity leave, they're (quite rightly) given leaflets on how to change nappies and manage their new baby's welfare, maybe there should be the odd leaflet on pensions too?
Early Christmas present?
Savers received a boost from NS & I as they announced an increase to their savers' rates plus more prizes for holders of Premium Bonds. This is following on from the Bank of England's recent increase in the base rate from .25% to .50%
N S & I's Direct ISA for example has risen from 0.75% to 1.00%, whilst their Investment Account has jumped from 0.45% to 0.70%. For children, the Junior ISA is now paying a more meaningful 2.25%.
The number of prizes paid out each month will increase from 2.3m to 2.9m – the highest number of prizes in any monthly Premium Bonds prize draw to date. The changes will come into effect from the December 2017 draw.
Autumn Budget 2017 – what it means for you
Financial advisers and other retirement experts collectively breathed a sigh of relief as Philip Hammond managed to resist any temptation to tinker with the pension regime in his 2017 Autumn Budget.
Speaking in the House of Commons on Wednesday afternoon, the Chancellor of the Exchequer did not utter a single word on pensions. Such a hands-off approach is likely to be well received among the financial services sector.
In addition, there were no significant tax changes in Wednesday's Budget that will have any impact for you which means that plans for the tax year ahead can proceed with confidence and clarity.
This was the first Budget of the new Parliament and the first in its new permanent autumn home. This now provides welcome breathing space between the announcement of Budget changes and their introduction.
Some of the key points for clients in the 2018/19 tax year as a result of today's Budget, and from measures already announced, are:
So, it seems that no news is good news for pensions investors.
Divorced women lose out on £5bn in pension payments each year
Scottish Widows research has found that divorced women are missing out on £5bn in pension payments each year, as experts highlight the need for women to take professional advice on pensions during the divorce process.
Office for National Statistics data indicates that 42 per cent of marriages end in divorce.
Research conducted as part of the Scottish Widows' annual Women and Retirement Report found that 24 per cent of divorced women are not currently saving into a pension, while 71 per cent of couples do not discuss pension arrangements during divorce proceedings.
Invest in financial advice
Whilst all the events leading up to, and beyond a divorce may be extremely distracting, let alone stressful, engaging professional advice remains key to reducing the number of women with pensions disproportionately affected by divorce.
Catherine Stewart, retirement expert at Scottish Widows, said women are generally less well-prepared for retirement. She attributed this to the gender pay gap, maternity leave and career breaks.
"Divorce amplifies that lack of preparation for retirement," she said. "I think a lot of it is down to some confusion around pensions. About half of them have no idea what happens to pensions when a couple gets divorced, and that might explain why that's ignored in discussions when they're coming to settlement," she added.
The Scottish Widows research found that 22 per cent of women believe that each partner retains their own pension, while 15 per cent presume that they are split equally, regardless of the circumstances.
Catherine added that the general lack of understanding of pension arrangements is accompanied by difficulty in access to advisers, and a tension between current and future needs.
She recommended that women "invest some time and money in getting advice, because it is quite a complex area and quite a lot of them particularly are looking at finances at that point in time and trying to minimise the expenditure".
"By spending a little bit on advice to understand what's best for them, it could actually be a good investment of their money".
Examine your options
Investing in advice may open up a range of avenues for female savers to explore when establishing the pension arrangements during divorce proceedings.
There are potentially three options available to divorcing couples:
Of course many women may have had career breaks to raise children, meaning that they might not have a good track record of paying into a pension, or have relied on a higher-earning partner.
Some women don't know what national insurance contributions they've made in the past so it's worth checking with the UK.Gov site in Newcastle at https://www.gov.uk/check-state-pension to see what State Pension you may be entitled to. If you have been absent from paid employment due to child care duties, there may be some compensation in the form of added NI contributions for the missing years. This is all part of sensible retirement planning.
Women must take back control
The gender pay gap is discussed as a contributing factor towards disparity in pension arrangements that can harm divorcing females. But women can still take measures to limit the impact of their divorce on their pension. As well as engaging a financial adviser, a good lawyer should get the value of that pension right.
In addition to contracting legal advice, women must do more to take on responsibility for their pension arrangements. They should do their homework, do their research. There is a lot on the internet talking about understanding the value of all your assets as a combined couple.
Women have to go and do it. Men will be doing something similar as well, and in a relationship, it's still normally the case that the man has more assets than the female.
Statistic of the week
Following on from my comments earlier in the month (15 September) about the importance of saving for retirement, the Office for National Statistics said total membership of occupational pensions schemes in the UK grew to 39.2m people in 2016. This represents a 17% increase on the previous year when membership stood at 33.5m. The body revealed that via auto-enrolment, nearly 80% of eligible savers are now paying into a workplace pension scheme. The amount being saved into a pension has not increased.
A step in the right direction, but still more to do to educate the population to save for their twilight years.
Mark Carney: Rate hikes will be 'gradual' and 'limited'
Bank of England governor Mark Carney has said he expects interest rate increases in the UK to be "gradual" and "limited" as he estimated inflation would remain above 2% for the next three years.
In a speech to the International Monetary Fund (IMF)in Washington DC, Carney said there would likely be "some withdrawal of monetary stimulus" in order to bring inflation back to the BoE's 2% target, according to the BBC.
Inflation beat expectations in August rising 0.3% to 2.9%, its highest since 2012, as it continued to feel the effects of the sterling devaluation following the UK's vote to leave the European Union last year.
In the Monetary Policy Committee last week, the MPC held rates at 0.25% but minutes revealed "slightly stronger than anticipated" UK economic growth could lead to a rate rise. When it comes, it may be a shock to some borrowers - especially those who have taken out a mortgage or a loan in the last 10 years and are yet to experience roller coaster borrowing rates. Whatever happens, I doubt the rises will be anything like as spectacular as those in the past. Back in the mid 80s for example, when I was a humble Building Society Manager, and rates were at 8%, I remember one very worried mortgage borrower coming into my branch saying to me "rates can't go to 9% can they?" They eventually peaked at 15%. Sometimes, it's important to keep things in context.
The Importance of Saving for Retirement
Pensions Awareness Day passed on September 15th, largely unreported due to more concerning news events in London and worldwide.
It has been over two years since the pension freedoms were introduced, allowing people to do what they like with their retirement savings rather than be tied to an annuity. Now, data has revealed the positive impact of the changes. According to a report by retirement specialist Aegon, the result has been that 5.5 million people are saving more for their retirement. This is significant as it suggests people are putting renewed faith in the pension system. As a result of the rise in the number of people contributing more to a private or workplace pension, the average pension pot has increased significantly. In April 2015, the average pension pot was £29,000 but this has now risen to £50,000, says Aegon. The 2015 pension reforms put many more retirees in the driver's seat for the first time. Giving retirees the freedom to do as they please with their money is having an impact not only on those who are taking advantage of that freedom today, but the trickle effect is positive down the generations.
Whilst this is seen as encouraging data, £50,000 would mean an annual income of just £2,500 a year for a person aged 65 or older. Combined with the full state pension of £159.55 a week, this would give a total annual retirement income of around £10,800. This is still woefully short of the average annual retirement income people aspire to which is £32,270, despite the average UK salary being £28,000. As the awareness level of pension saving has improved over the past few years, it is obvious even more needs to be done across the financial services sector to better educate people on the importance of putting away as much as they can towards retirement. In particular, we must better engage with the younger generation through technology and information that can be made readily available and easy to digest.
For the statistics geeks amongst you, the 12 million people aged 30 to 65 who are not saving for a pension are equivalent to the population of Rwanda; or put another way, enough people to fill 141,183 double-decker buses - themselves sufficient to stretch bumper-to-bumper from Land's End to John O'Groats.
Inheritance Tax (IHT) is affecting more and more of you – what can you do to avoid it?
Positive market conditions coupled with the frozen nil-rate band have helped to significantly increase government inheritance tax (IHT) receipts this year according to figures from HM Revenue & Customs (HMRC). These showed that IHT income surged by more than 20% in the first four months of the tax year with almost £2bn being taken from people's estates between April and July.
Analysis from NFU Mutual found the total had gone up faster this tax year than in any other since 2010. The provider said it signalled a more aggressive approach from HMRC and it would appear that HMRC are paying closer attention to people's estates.
The UK housing market remains generally buoyant as demand continues to outstrip supply. In these conditions, a positive market increases the value of client assets therefore, with the knock on effect that estates play a role in the rise of IHT levels.
Even though the government has introduced the residence nil-rate band, that is negligible in the grand scheme of things, particularly with the growth of property values in the south-east.
This is a simple and efficient way to mitigate liability.
The annual gift allowance, which stands at £3,000 and regular pension income gifting, which allows people to gift as much of their pension income as they wish as long as it does not affect their lifestyle.
Don't ignore the annual gift allowance just because it seems quite small – a gift of £3,000 per annum for 10 years will add up to £30,000 of an estate. Meanwhile, with regular income gifting, if someone has a pension income of £60,000 a year but all they need to live on is £20,000, in theory they can gift that additional £40,000 a year.
Any money held in, or put into a personal pension is deemed to be outside an estate for IHT under current legislation. For some, their pension pot is now their largest asset and it can be a useful vehicle for squirrelling away funds from the tax man. There are limits as to what you can put in of course, but there is the added benefit of tax relief at your highest marginal rate on all contributions made.
There are various ways of mitigating IHT and a good financial adviser should look at tax efficiency as part of their advice.
The Golden Decade
The whole purpose of saving for retirement is to be able to afford to enjoy life. I'm sure we all aspire to live comfortably and to make the most of all that leisure time.
Many of our clients tell us that the best ‘golden time' years for achieving maximum enjoyment in retirement is from about age 58 to age 68. This is because they are finally free from the shackles that have held them back in past – lack of time, debt and family and work commitments for example. During these years there is also a good chance that one's health will still be favourable and there will still be enough energy left in the tank to undertake long distance travel or commit to voluntary work or new pastimes. For some, but by no means all, after age 70 the mind and body may start to slow down and there could be less inclination to be busy with stressful activities.
There is a rising trend towards ‘pretirement' – this is where people scale back on work by doing reduced hours or days, rather than stopping work suddenly altogether. Waking up on a Monday morning ‘retired' after stopping work completely the previous Friday can sometimes have a catastrophic effect on both body and soul. We advocate a gradual easing into retirement if possible, which we believe is good for one's well-being and health. The mix of work and pleasure will be less of a shock to the system. It seems that more of you feel the same way, as the trend has persisted for 5 years in a row now.
Of course not everyone is lucky enough to be able to make this sort of choice, however – many will find themselves having to work on for financial reasons while others may be forced to give up work for health reasons or redundancy. Recent independent on-line research on 10,605 non-retired UK adults aged 45+ found that people remained in work for reasons other than financial benefit. Some would be happy to work on beyond state retirement because they didn't like the idea of ‘being at home for so long' or just didn't feel ‘ready to retire'. A small proportion said they needed to carry on working to boost their pension pot.
This brings me back to the ‘pretirement' scenario. If you are funding your well-earned leisure time from your pension, a part-time job or perhaps both, and you are young enough and fit enough to enjoy life then go for it while you can. Time may be of the essence. Clearly this must be within your means, so nothing too reckless! Advice from a good independent financial adviser will help you to manage your pension income to ensure that it lasts for as long as you need it to.
MPAA reduction effective from April 2017, government confirms.
The government has confirmed the pre-election policies in its 2017 Finance Bill that were due to take effect from April this year, including the cut to the money purchase annual allowance (MPAA), will apply as intended.
This means savers who have accessed their pension from age 55 will see the annual tax-free allowance (ie what they could contribute back in) cut from £10,000 to £4,000 for the 2017/18 tax year. The original limit of £10,000 was introduced in April 2015 to stop people claiming further tax relief on any new contributions made to their pots.
Many retirees were hoping that the decision would be delayed until next year, but at least we have some clarity now.
British workers are missing out on ‘buy one get one free' pension offer
This was the headline in an article in the financial press over the weekend. Basically, for those of you that have the pleasure of working for a large company, and that company matches your own pension contributions, you are encouraged to double-check the maximum percentage of employee pension contributions your employer is willing to match. According to the piece, there are around 3.2 million UK workers who work for larger employers who are failing to take up an average of £650 each year.
The article focuses on a major high street supermarket, which like many responsible employers, operates a scheme where an employee's basic pension contribution is 4% of salary, matched by a 4% employer contribution. Employees are, however, able to opt to increase their contributions, which the company will then match up to a maximum of 7.5%. Often though, firms are somewhat tardy in their willingness to publicise this to all their employees meaning that some workers may be blissfully unaware of this option. In effect they are passing up ‘buy-one, get-one free' cash the piece argues, adding: "Royal London estimates a 40-year-old on average earnings, who chooses to take full advantage of an additional 3% employer-matched contribution, would have an income in retirement nearly £3,500 a year higher than someone who only contributed at the minimum level." This could make the difference between an income of £19,050 without the extra contributions, and one of £22,500 for those who took up the full employer match." Of course some firms may have only recently introduced enhanced employer contributions following the closure of their more generous defined benefit or ‘final salary' schemes.
Anyway, it's worth checking with your employer to make sure you are making the most of what's on offer. The article also gives some other helpful information reminding readers that there are also other ways to top up your pension such as via Additional Voluntary Contributions, the new Lifetime ISA product and Added Years.
Hung, drawn, but not quite quartered
Just like other recent elections such as Brexit and Trump, the unpredictability of the electorate remains alive and kicking. It just goes to show that past performance really isn't a guide to future performance and we can no longer rely upon what held true in the past. However, as far as how some commentators are interpreting the election result this morning, the Brexit majority last year was far more an expression of general discontent with the political establishment than a rejection of EU membership. Otherwise Mrs May should indeed have been unable to lose the way she did. It seems that the cosmopolitan townies this time got their act together and actually turned up to vote, whereas the discontented masses outside the towns and cities have endorsed their message that they are fed up with the status quo – but that they understand that Brexit may actually worsen not improve their positions.
This is important, because it means that the Conservative's "no deal is better than a bad deal" and even perhaps "Brexit means Brexit" are no longer a winning formula for the government. It is possible that this therefore points to a much softer Brexit than expected over the past 9 months. Yes, it can be argued that May's negotiating position with the EU has weakened, but the lack of hard Brexit support by the British people should also mellow the EU establishment who can no longer argue wholeheartedly that the British public can only blame itself for hardships from a hard Brexit outcome.
At first glance, one might think that a weakened Conservative government increases uncertainty, and uncertainty is bad for business, markets and investors. That may have been true in the past, but is not necessarily true under the perspective of Brexit. Some analysts will argue that the economic future of the UK will be far more decisively shaped by the UK's future trade relations with the EU than even a Jeremy Corbyn led ultra-left UK government would ever have.
Of course there is still much to unravel and many issues for politicians to discuss and agree upon. We do not know if, and how long for, Theresa May will remain as leader of her party. With this in mind, as we have often said, and just as was the case after all the other recent political surprises, the best advice for investors is to keep calm and carry on. And not to be overly surprised if markets head into a slightly different direction than perceived wisdom first suggests.
Stock markets buoyed by strong economic data in the UK and US
The FTSE 100 and FTSE 250 have hit new all-time highs, as strong economic data at home and across the pond buoyed investor confidence.
The UK blue-chip index hit a new all-time high of 7,599 before falling back to nearer 7500 but still up on the day. It was a similar story for the FTSE 250, which hit 20,081 before falling back to 20,027, up 16 points on the day.
The UK followed the lead of the US, where markets closed at record highs last night, after private sector jobs figures to be released today. This news has fuelled further speculation of an interest rate rise later in June according to market analysts. Adding to the cheer was a jump in the UK construction purchasing managers' index figures, which hit 56 in May, up from 53.1 in April, and confounding investor expectations of a dip to 52.7. Any reading above 50 indicates expansion.
Here at Pension Drawdown we remain cautiously optimistic for investors' steady growth over the medium term. However, there are still many ‘known unknowns' going on in the World (Brexit, Trump, General Elections in the UK and Germany, the Greek debt crisis, terrorist events and North Korean pyrotechnics). Who knows what the impact and outcomes might bring so there is still the expectation of some sort of a market correction – but when, and by how much, well that remains to be seen.
Beware of the unscrupulous
The Defined Benefit (final salary pension) advice market is growing as cash equivalent transfer values continue to hold up at very high levels. In addition, a softening of approach from both the Regulator and the financial media regarding the merits (or not) of leaving a gold–plated final salary scheme, has seen an increased demand for financial advice in this area.
Whilst Pension Freedoms are providing more choice for savers, unfortunately they have also opened up the market to conmen and fraudsters who prey on the vulnerable and those hoping for early access to their pensions.
Pension scam losses hit a monthly post-pension freedom high of £8m in March, according to figures from the City of London Police.
The record £8.6m losses came from just 24 victims, and totaled more than the previous 12 months' reported losses combined.
The previous post-pension freedom high was a reported £4.9m loss from a total of 78 victims in May 2015. Savers have now reported £42.5m worth of scams since April 2014.
The City of London Police said loss figures are reported by victims themselves, so human error needed to be taken into account when assessing the statistics.
Pension scams have been a major concern since the advent of Pension Freedoms and research from earlier this year indicated two-thirds of advisers fear industry efforts will not do enough to stop scammers. We have warned clients and potential clients before of this modern day scourge, and like a local Neighbourhood Watch scheme, we can all do our bit to prevent financial crime. Our message remains simple:
Do not respond to cold calls, do not be rushed into anything and if the offer sounds too good to be true then it probably is! You cannot access your pension until age 55. Make sure you know who you are dealing with - what is their level of qualifications and expertise? Can they demonstrate a long track record of providing pensions transfer advice? Finally, do consider getting a second opinion before taking action.
Pension Freedom withdrawals exceed £10bn
Pension freedom opportunities have been very popular.
Since their introduction in April 2015, more than £10bn has been accessed flexibly the latest HM Revenue & Customs statistics have shown.
In the first 3 months of 2017, a total £1.59bn was flexibly withdrawn - the most in any quarter since Q2 2016 and the second highest figure seen. More than 390,000 flexible payments were made in the quarter.
The first quarter of 2017 also saw the highest number of individuals access their pensions flexibly with 176,000 people doing so - 14,000 more than the previous high of 162,000 in October, November and December last year.
However, despite the high total amount withdrawn in the first few months of this year, average withdrawals per person have continued to fall - a trend seen since pension freedoms' introduction two years ago.The average amount of money withdrawn per person has plummeted to £9,034 in Q1 2017, (from £18,571 in 2015).
Hopefully this downward trend is indicative of savers managing their retirement incomes sensibly and making withdrawals at levels that will be sustainable over the long term.
Fall in cost of Lasting Powers of Attorney registration
COURT OF PROTECTION: LPA registration fees will fall in April
On 1 April 2017, the registration fee for a lasting or enduring power of attorney in England and Wales will be cut from £110 to £82. The fee for a repeat application to register an LPA will fall from £55 to £41. The Office of the Public Guardian says the increasing volume of applications means the income it receives in registration fees now exceeds the cost of the service.
Whilst this is probably something that is not high up on your ‘to do list' we would encourage all clients with assets under management to put in place an LPA for property and finance. This is an ideal opportunity to take advantage of the reduced costs. Health and welfare LPAs should also be considered at the same time. The best time to do it is while you, or your relatives still have the ‘capacity' to arrange it.
Spring Budget 2017
Thankfully, in his Spring 2017 budget, the Chancellor, Philip Hammond largely left pensions alone and there were no surprises. There is another budget in the Autumn so any more tinkering to pension legislation may have been deferred until then. We will have to wait and see. From an industry point of view, the fewer changes the better, as this helps to build confidence in the system and investors can plan ahead with greater confidence. One important change that is coming in from April 6th 2017 is the reduction in Money Purchase Annual Allowance from £10,000 to £4,000. This was announced last year and has been ‘under consultation' - well it's definitely happening. In plain English, if you are already taking an income from a pension but want to add more to it, the amount you can put back in and get tax relief on is reducing drastically!
Please see this attached link to a full budget summary.
High earners may be able to get help from this little-known pension rule
You may not be aware that there is a little-known ‘carry forward' rule that could allow you to invest up to an additional £130,000 into your pension (and receive up to £58,500 tax relief). This year's pension annual allowance is as low as £10,000 for some high earners but it may worth talking to your tax adviser or financial adviser to ascertain if there any headroom that would enable you to utilise unused allowances from the last three tax years:
Tax Year Annual Allowance
For the tax year ended 2014, this is your last chance to carry forward anything unused from the £50,000 annual allowance – if you don't use it by April 5 2017, it will be lost forever.Basically, if you haven't used your full annual allowance in any of these previous tax years then carry forward allows you to make up for that and contribute up to an extra £130,000 in this tax year. However, there are some restrictions such as having had the earnings of at least the amount you wish to contribute. There are other considerations so we recommend that you take the appropriate advice before taking any action.
The deadline is for action looming
The deadline to make pension contributions and receive up to 45% tax relief is fast approaching on 5 April. Tax relief has been cut in each of the last four tax years for some groups of people. However, it may be wise to consider making any planned contributions before The Budget on 8 March in case the Chancellor announces any changes or restrictions.
If you have more than one pension, or have been a member of a final salary scheme, you should also allow more time, as you might need to obtain information about your contributions from your pension administrator.
Remember, tax rules can change and the value of tax benefits depends on your individual circumstances. Investments can go down as well as up so there is always a danger that you could get back less than you invest. Nothing here is personalised advice, if you are unsure, you should seek advice from an independent financial adviser.
The clock is ticking for savers wanting to make the most of this year's "use it or lose it" Individual Savings Account (ISA) allowances.
ISAs are now more generous, and more flexible. This year savers can put £15,240 into an ISA and this will increase to £20,000 per person in the new tax year from April 6.
Savers can switch from Cash to Equity holdings – and vice versa – within this tax wrapper, useful for when your circumstances, or economic conditions, change.
You can also take money out of an ISA and pay it back within the same tax year. This change only came into effect last year, so if you've used it to withdraw funds, you've only got a few weeks if you want to top them back up.
Those who can afford to should look to maximise this allowance. This allows couples to save more than £30,000 a year, tax-free. Remember all future growth is free of capital gains tax (CGT).
Even if you don't have these sums spare, it's worth saving what you can into an ISA. Look at existing investments: if these aren't held in a tax-free wrapper now may be the time to transfer them. According to the Prudential £342m is wasted this way every year.
The past few years have been challenging for investors. In fact, some people may question the ability of markets to help them meet their financial goals. History has demonstrated that a long-term investment strategy is more often than not rewarding. For this reason we believe it's important that investors utilise their ISA allowance. Please remember past performance is not a guide to the future and the value of investments can go down as well as up and you may get back less than you invest.
The current tax year provides each individual with an ISA allowance of £15,240 – that's a total of £30,480 for a couple, all protected from the clutches of the taxman. From 6 April 2017 this rises to £20,000 for each individual, so totalling £40,000 for a couple. It is also proven that the earlier you start investing in an ISA, the sooner your tax efficient investment begins to work for you. If you've not yet invested in an ISA this year, don't worry as it's not too late. What's most important is that you fully utilise your allowance where possible, as once the ISA deadline passes you lose any unused allowance forever. The value of tax savings and eligibility to invest in an ISA depends on personal circumstances and all tax rules may change.
When you invest in an ISA, you will have the benefit of not having to pay tax on your investment returns. This means you could build up a substantial sum over the years by investing in cash, equities or corporate bonds to provide growth or income, which you can withdraw whenever you want. Alternatively, if you don't want to make a decision immediately about where to invest, but equally don't want to lose your allowance for this tax year, some providers offer you the option to ‘park' the whole Stocks and Shares allowance in cash until you are ready to invest in the qualifying fund of your choice.
Only you can answer this question and it depends on your personal circumstances. However, for many people, an ISA is one of the most generous handouts they will receive from the Chancellor. Over the years, an ISA could save you thousands of pounds that you would otherwise have had to pay in tax. In an era when the upward pressure on tax seems to be relentless, this is doubly important. Every time taxes rise, the ISA tax break gets even more valuable. For example, two separate £15,240 investments – one held in an ISA and the other outside an ISA – invested yearly could be worth after 10 years £5,302.30 more in the ISA.
Source: Fidelity, using growth rates of 4.5% (non-ISA) and 5% (ISA). The calculations assume no initial charge and an Ongoing Charges Figure of 1.17%. It does not include any fees charged by the fund distributor or your adviser. This is a projection of the returns you may receive back. Cash amount is not guaranteed as it will depend on the performance of the investment. Any additional charges will have the effect of lowering what you might get back.
5 Ways to save tax without getting into trouble
This time last year I was writing about the turbulence being experienced in world stock markets. Thankfully, 2017 has started somewhat serenely which is a little surprising considering all the speculation and uncertainty around when and how Brexit will happen, and what sort of President Donald Trump will turn out to be.
Without that distraction, now may be a good time to take stock and to start thinking about how you can save tax without upsetting the taxman. Her Majesty's Revenue and Customs (HMRC) are very keen to ensure that people understand the distinction between tax avoidance (which is legal, and to some, an art form); and tax evasion, which is illegal.
Here are a few tips that you might wish to consider:
As with all important financial planning matters, it is sensible to have a discussion with your financial adviser or tax adviser before making a decision.
Merry Christmas from The Pension Drawdown Company
As we pause at the year end for the traditional Christmas and New Year festivities it is also a time to take stock and reflect on 2016 as a whole, and how the pensions industry has fared.
Even though there was startling news about BHS, Tata Steel and the record final salary transfer values, it was a bigger year for other news. From Leicester City to Brexit, from Trump to Andy Murray, 2016 has been a year of the unpredictable.
2016 has provided a good lesson that none of us should rely on opinion polls, newspaper predictions or the views of high profile politicians. Of course this all makes for a tough time when making investment decisions. What it does highlight though is that calmness is key and this is no time to panic. We all know that pensions is a long-term game and in all probability the long-term outlook hasn't radically changed. Markets will continue to go down as well as up.
But what we do know is that whatever happens, 2017 is panning out to be very interesting.
Have you set up a Power of Attorney?
The Daily Telegraph has reported that there has been a huge increase in the number of Lasting Powers of Attorney registered in recent years. In 2015 over 440,000 were registered compared with just 36,000 in 2008. The recent rise in the prevalence of dementia and Alzheimer's disease - now the cause of death of one in eight people in the UK - is one major factor. If relatives have not put an LPA in place before someone loses the mental capacity to make decisions, they have to apply to the Court of Protection, which is a lengthy and expensive process. It is therefore sensible and prudent to do this at an early stage as part of your financial planning actions.
Impact on Pensions
The new Chancellor's first Autumn Statement didn't contain any major tax or pensions changes that have any immediate impact for our clients. It appears that now is still not the time for a major pensions shake up so it will be nice to have business as usual for a while so that you can plan ahead with confidence and clarity.
There was welcome news that pension tax relief remains untouched, so it could be the perfect time to maximise funding and secure higher rate tax relief.
Philip Hammond announced just one cut to pension allowances. The Money Purchase Annual Allowance (MPAA) is set to be cut from £10,000 to £4,000 from April 2017 (subject to consultation). This only affects those clients who have accessed their defined contribution (DC) pension scheme under the new pension flexibilities and continue to pay into their pension. HMRC introduced the MPAA in 2015 to ensure that there are no potential recycling issues with individuals claiming further tax relief on any new contributions made having just taken their pension benefits under the new flexibility rules. For many, a drop in the annual allowance is of no significance. However, for those who have phased their retirement, perhaps by working part-time, they need to wary if they still wish to continue funding, or more importantly are benefiting from employer contributions via auto enrolment. As ever, we recommend discussing any concerns with your financial adviser.
The General Economy
Philip Hammond announced that this will be the last Autumn Statement. From 2018, the Budget Day will switch fromSpring to Autumn, with a toned down financial statement on the economy delivered each March. Next year though, there will still be two Budgets. This will give welcome breathing space between the announcement of budget changes and their introduction. Perhaps this somewhat surprise announcement was an attempt to regain some of the limelight currently being enjoyed by one of his predecessors - Ed Balls.
It seems that it will take a little longer to balance the books for UK PLC and there was an upward revision of the country's borrowing requirement. The £23bn that has been pledged for infrastructure spending is welcomed so long as there is action and not just words. Here in the South West, the vital (and only) rail link with the outside world has once again been severed due to the effects of bad weather. The irony is that it comes at a time when the Peninsula Rail Task Force, a regional campaign group set up to lobby the Government for improvements, was forced to drive to London for their meeting rather than being able to take the train!
Trump and beyond
No, it wasn't a dream...
The surprise US election victory by Donald Trump has greatly increased uncertainty, yet markets are now back at similar levels to a couple of days ago when a Clinton victory looked more likely. The parallels of the UK's Brexit vote with the US presidential elections are obvious, but financial markets have responded rather differently this time. Though Asian markets posted stronger losses, the Euro Stoxx 50 and the FTSE 100 have recovered their losses during the day, and European bond yields have hardly responded either. But, trading volumes are average, the FTSE 100 is calm and there has been no rush to the stock market exit doors. After the turmoil of Brexit, this has not been a "plus, plus, plus" day in terms of volatility, so far, this is Brexit minus.
However, it's still going to take a significant amount of time to assess the implications beyond the short term.
It seems that Investors are in wait and see mode and probably many plan to sit out the uncertainty created by Trump's victory, apparently in the hope that some of his more outlandish plans such as repealing trade agreements and deporting immigrants will prove to be mere campaign talk. But policy uncertainty is undoubtedly higher now. Given Trump's lack of governing experience and outsider status, his election will indeed mean far more uncertainty about the future direction of US policy than Hillary Clinton.
The strengthening of the US economy which was further evidenced over the last week by improving corporate profitability, rising employment, better business sentiment readings and the central bank indicating a December rate rise, is highly likely to bring market emotions quickly back to a very different reality. One of persistent, steady economic growth, which so far has withstood so many headwinds over the past years that an overpromising Donald Trump is unlikely to significantly derail it either – certainly in the short to medium term.
Those who are fearful about the prospects for their investments in the short term, should think back to the summer and all the doomsday market scenario predictions ahead of the EU referendum and take note that there was much less of this type of comment before this election.
In his acceptance speech, Donald Trump already changed his tone significantly from his trademark divisive style to a far more conciliatory one. He invited the whole nation to come together and unify to move the country forward with great tasks ahead, mentioning among other things the rebuilding of US infrastructure. Notably his more aggressive campaign statements of building walls and expatriating illegal immigrants were absent. Perhaps he will come across as more ‘presidential' sooner than many of us think and with less flamboyance.
Keep calm and carry on, is my advice in these interesting and sometimes disturbing times. The global economy is going strong and there is little reason to believe that the recent strength of the US economy will falter over the short term. As the markets discovered with Brexit, a vote doesn't actually change anything immediately.
FTSE 100 breaks 7000 barrier
The fact that the FTSE 100 index has risen above the 7000 threshold for the first time since May 2015 is worth a mention.
Who are the winners and losers?
That depends on whether or not you are an investor. It's certainly good news for pension drawdown investors and other stock and share investors who will have seen the value of their portfolios rise over the last few months. It should also be good news for beleaguered endowment plan holders once these returns start to filter through.
On the flip side, the value of the pound against many other foreign currencies has plummeted so it may be bad news for those pensioners and others who like to travel abroad. Their pound isn't buying as much foreign currency as it used to before the summer. There are approximately 6 savers for every borrower in the UK many of whom are people of pension age and there seems little prospect of deposit interest rates rising anytime soon. A weak pound is good news for companies that export goods abroad but not for importers. As a country, the UK imports 40% of all that we eat so a weak pound will means upward pressure on some food costs and possibly higher inflation at some point.
That said there are plenty of positive economic signals out there and only this week Mrs May told us that the UK economy was in good shape, with employment at a record high and inflation at a record low.
So, post Brexit the UK hasn't turned into a third world economy, life goes on despite the headwinds being thrown at us by a pessimistic media, and a (rightly so) cautious Chancellor. It's up to us to look ahead with positivity - is your glass half empty or half full?
Earlier this year, Old Mutual Wealth commissioned research on the benefits of taking professional financial advice. Their findings show that planning pays and that taking financial advice and setting goals can make a real difference. This makes good sense to me and emphasises the importance of have a good financial adviser to guide you through the markets.
Defined Benefit Pension Scheme Deficits are in the headlines again
Once more Defined Benefit Pension Scheme Deficits are in the headlines as the Daily Telegraph reports today that they have hit a record high of £710 billion - these schemes pay a guaranteed income for life on retirement which is linked to a person's final salary. Every time interest rates are cut, the yield on long-term bonds tends to fall which causes the funding deficit to increase. The long-term outlook for interest rates is lower to unchanged and as such it looks likely that these pension deficits could continue to increase. This means large companies are faced with decisions about how to fund their pension deficits which could well affect their long-term profitability.
Longer term it could lead to changes in the way the pensions are paid - such as pension increases being limited to CPI rather than RPI.
There are currently 1.7 million people who are active final salary scheme members, whilst 4.9 million people are deferred members of such schemes. It is these deferred members who may be interested to find out the Cash Equivalent Transfer Value of their pension - as post Brexit these have risen to unprecedented levels - as they too are linked to long-term gilt yields. With the post Brexit fall in interest rates, many transfer values have increased to reflect the fact that the market is pricing in lower long-term returns. In some cases the transfer values are now reaching 30 times the projected annual incomes of the final salary schemes.
To transfer out of a final salary scheme requires financial advice, as the pension member is giving up a guaranteed income for life and taking on investment risk, but for some people it is something that should be considered. There has been a huge increase in the number of people exploring cashing in their final salary schemes - because this means that they can take advantage of the new Pension Freedoms and access their pensions from the age of 55, sometimes with larger tax-free cash lump sums than those available from the scheme. It also means they have the flexibility to vary their income to meet their varying income requirements, and it also means they can pass their pension in its entirety to their spouse, children or any other named beneficiary when they die, tax-free should they die before age 75, or at the recipient's marginal tax rate if they die post 75. Most Defined Benefit Schemes pay a spousal pension of only 50% and do not allow these funds to be paid to other dependents.
Sources: Daily Telegraph 01/09/2016, Financial Times 6/7 August 2016
Retirees prove more prudent than expected after pension freedoms
Total payouts in the first year of pension freedom reached £8.2bn, according to data from the Association of British Insurers (ABI).
This is a vast sum of money but British workers reaching retirement have proved to be more prudent than many believed they would be after receiving new pensions freedoms a year ago.
The Pension's minister at the time, Steve Webb, said pensioners could buy Lamborghinis should they wish to do so after the rules forcing people to buy annuities were swept away in April 2015. This fanned fears that pensioners might blow their cash on cruises or pour it all into buy-to-let properties.
A year later, however, six out of 10 pensioners are withdrawing money from their pension pots at a rate of around 4% a year.
The figures cover the first complete year of pension freedom, which began in April 2015.
Annuity sales have taken a hammering, falling from a peak of £12bn before the new freedoms to £4.2bn in the year to the end of April 2016, and they are expected to fall further in 2016-17.
Most of the money that previously went into annuities is now lying as cash in people's pension plans, or has been transferred into drawdown plans that allow pensioners to choose when to take out their money.
Drawdown sales were £6.1bn in the year to April 2016, with the typical saver putting £67,500 in to their scheme.
Freedoms 'Are Working'
ABI director of policy, long-term savings and protection Yvonne Braun said: "The data shows that the freedoms have been implemented successfully, and are working as intended. New data released shows that more than half of pots are having less than 1% withdrawn a quarter, which seems to indicate most people are taking a sensible approach.
"However, the data also suggests a minority are withdrawing too much too soon from their pension pot - 4% of pots are having a tenth or more withdrawn - and many other customers are taking their entire pot in one go.
"There may well be other factors at play here, such as people having other retirement income, for instance, final salary pensions or multiple pots. But this is a warning sign that requires further investigation. We need a full picture of these customers' circumstances and income, which is something we urge regulators and the government to work with all stakeholders to examine.
"The fall in annuity sales in the most recent quarter reflects ongoing pressure on rates, which will not have been helped by the recent decision to lower interest rates to a 300 year low, and further quantitative easing measures."
Another commentator said: "A picture is beginning to emerge of savers adopting a sensible approach and using the pension freedoms wisely.
"However, there are a minority who it would appear have forgotten the reason they saved in the first place, to pay them a salary in retirement. Let's hope these people have other sources of income for retirement, as at the withdrawal rates the numbers suggest, they will very quickly deplete their funds."
I imagine that the recent cut in the Bank of England base rate and the introduction of further quantitative easing will place even more pressure on annuity sales and the ability of companies to sustain their final salary schemes. Deficits in these schemes are already increasing at an alarming rate, this month, the deficit for companies within the FTSE100 has widened further to £63bn (source: BBC). That said, the pension industry is not in dire straits, the vast majority of funds are robust and well run, and most deficits are being managed accordingly. In recent times there has been unprecedented change and challenge within the pensions industry which makes it even more important for the consumer to consider all possible retirement options by seeking professional financial advice
Interest rates fall further
The Bank of England has trimmed rates for the first time since 2009 to a fresh record low of 0.25% as it seeks to fend off the apparently deepening shockwaves of Brexit.In addition, it has approved £60 billion in further asset purchases and for the first time, the Bank of England will follow European and Japanese central banks into purchasing commercial bonds, committing a further £10 billion to buy corporate debt.
So, although short term interest rates have just halved, the real concern for investors is the dramatic decline in long term interest rates, which have led to a further fall in annuity rates, and providers withdrawing from that marketplace.
Most investors seek long term certainty in retirement income which is challenged by the sequence of returns in volatile investment markets. The concern now is to know what to invest in – how does one balance risk, reward, diversification with simplicity and cost-effectiveness?
Investors don't necessarily have to climb the risk ladder in search of higher returns. Metlife has a proposition which is worth a look at. They offer guaranteed INCOME FOR LIFE, whilst keeping the fund fully invested and accessible.
This proposition is available in Pension, Investment Bond and ISA formats. With the pension drawdown proposition it provides the best of both worlds by taking the advantages of the flexibility of drawdown and access to capital, together with the certainty of income that you get from an annuity product.
Because they are a leading global insurer, they are able to offer a full table of Guaranteed Income Percentage rates for ages 55-75+
Their rates which are fixed at inception have not reduced despite the fall in long term interest rates.
Here are a few examples:
|Age||Guaranteed Income for Life Rate|
Met Life's products are fully covered by the Financial Services Compensation Scheme, with fully invested funds managed by BlackRock and Fidelity.
Uniquely, MetLife locks in any investment gains above the secure value daily, so a rising income has already been a reality for some clients since launch.
As the value is locked in, the new secure income level becomes the income for life.
These propositions are only available via an IFA so before taking action, it is sensible and prudent to take independent advice.
Final Salary pension values soar post-Brexit
The UK's decision to leave the EU has pushed gilt yields to historic lows, sending defined benefit transfer values to record highs (source: Xafinity).
Following the historic referendum on 23 June, UK 10-year gilt yields tumbled to below 1 per cent for the first time ever, increasing the cost for final salary pension schemes (DB schemes) to meet their liabilities. This has automatically increased the value of DB transfers, better known as Cash Equivalent Transfer Values, which are calculated according to the cost of meeting liabilities.
For example, Xafinity calculated that on 30 June, a 64-year-old with a DB pension worth £10,000 a year could expect to receive a cash sum of £223,000 if they transferred now. This was £20,000 more than the value on 1 January this year and £25,000 higher than in March 2015.
I see that FTAdviser report that post-Brexit, it had become more expensive for DB pension schemes to meet their liabilities, because their favourite type of investment - UK gilts, were no longer doing the heavy lifting. But unfortunately for DB schemes, this also meant the value of Cash Equivalent Transfer Values had gone up, because they are calculated according to how much of today's money it will cost the scheme to make good on promises to members.
While this is good news for members looking to take a transfer value of their defined benefits I would stress that it should not necessarily be read as advice to transfer out of a DB scheme.
Whether now is a good time to transfer, or whether to wait is where the view of an independent financial adviser is really important – and it is essential that you seek good quality independent financial advice from a pension specialist before taking any action.
Let the dust settle
The people of Britain have voted to leave the European Union. This clearly represents a very significant decision for the UK, for the European Union and indeed for the wider global economy, how the UK's long-term economic future will be affected by it is still somewhat unknown.
There will be challenges in the short and medium term as we now face a period of uncertainty whilst the exact terms of Britain's exit from Europe are negotiated.
Here at Pension Drawdown our portfolios have already been aligned to cope with the challenges facing these markets. Our recent strategy has been to reduce exposure to UK and European markets. Although markets have fallen in line with their equity content, they will be down much less than pure UK stock market investments and the FTSE 100. Overseas funds have benefitted from the falling pound which has helped to offset the European equity falls.
Now that we have the result we intend to 'keep calm and carry on'. In practical terms this means that while the market storm rages over the shorter term we will not be tempted to make any sudden moves. This prevents crystallising temporary losses, when there is a strong possibility that after the initial reaction markets will recover somewhat and stabilise as we all await detailed plans of how to make the best of the changed framework.
Despite these headwinds, we remain confident that in the medium to long term, our portfolios will continue to deliver positive returns that we continue to focus on.
FCA announces early exit charge cap proposal
The Financial Conduct Authority (FCA) has announced that early exit charges for existing contract-based pensions, including workplace pensions should be capped at 1% of the value of a member's pot.
Britain's financial watchdog is taking action after the chancellor, George Osborne, pledged in January to tackle the "ripoff" charges levied on people aged 55 and over who want to make use of the pension freedoms introduced in April last year. The charges can run into thousands of pounds. Although the cap will not come into force until next April, this is a good first step.
Under the proposals, firms will not be able to apply exit charges for personal pension contracts from the date the new rules come into force (which is yet to be determined).
The FCA is consulting on the following measures:
Christopher Woolard, director of strategy and competition at FCA, said:
"This is an important step so people feel able to access their pension savings should they wish to."
Minister for pensions, Baroness Ros Altmann, commented:
"These changes are about giving everyone who has worked and saved hard for their retirement a fair deal by removing the final barriers to the pension freedoms."
If the Bank of England does not understand the pension system...
Well it appears that even the best of us may struggle to make sense of the great British pension system. Andy Haldane, chief economist of the Bank of England, has said that the British pensions system is so complicated that even he struggles to understand it. In a speech at the New City Agenda annual dinner on May 18th, Mr Haldane said he is "moderately financially literate" but due to the system is "not... able to make the remotest sense of pensions". He said that growing freedom and individual responsibility combined with a lack of knowledge would become an increasingly pressing problem. In some ways he is quite brave to make such an admission – something that could have undermined his credibility. As I've said before, early financial education for the younger generation is one solution but the importance of getting good quality financial advice from the people that know cannot be under-estimated either. My colleagues at Pension Drawdown are well qualified with years of experience behind them and they will happily explain things in plain English for you.
The Bank of Mum and Dad enters the top 10 mortgage lenders in the UK
Parents are expected to give their children an average of £17,500 this year to help them get on the property ladder, according to Legal & General (L&G) data.
Low or no interest rates, long or infinite repayment periods and a personal service: It's not surprising the Bank of Mum and Dad is Britain's best-loved financial institution. It's a little more surprising what a major player it is in the UK housing market as data suggests that it will be at least part-funding a quarter of all UK mortgages. Family members are helping 300,000 people onto the housing ladder this year.>
But it warns this method of lending is coming under increasing pressure.
Whilst The Bank of Mum and Dad plays a vital role in helping young people to take their early steps on to the housing ladder, it highlighted a number of important issues, including house prices being "out of sync with wages". Older "lenders" will increasingly need to ensure that their own income and care needs in retirement can still be met even after providing housing support to their children. For many the option remains of releasing equity from the family home to supplement pension income. Equity release or lifetime mortgages remain under-used, with only £1.6bn of transactions in 2015, though more people are giving them serious consideration. However, Bank of Mum and Dad cannot continue to grow indefinitely: parents and grand parents are living longer, and many will face expensive and often unexpected care costs in old age.
What is very clear from research is that Bank of Mum and Dad on its own cannot solve the crisis of housing supply and affordability. It is neither available to enough people, nor sufficiently sustainable over the long term as care costs rise.
The Government has made a number of attempts to address the issue of affordability for first-time buyers: Help to Buy and, most recently, the Chancellor of the Exchequer's planned "Lifetime ISA", which will be available both for retirement savings and for first-time house purchases in 2017. These may help some, but ultimately they introduce more money into the system, stoking up housing demand when the real issue is about the supply of housing.
Some societal changes will help relieve pressure. The way we "do" mortgages in the UK is changing and will have to change further: it is likely that the traditional approach to repayment and outright ownership in time to retire will change. Mortgage terms may get longer.
Then again, more people may choose to rent, for lifestyle reasons, and because the transaction costs (such as stamp duty) are too expensive for someone climbing the traditional housing ladder.
But the challenge for young people is wider than this. It's one thing to have a roof over your head but another, quite different matter in securing financial stability in the golden years of retirement. My biggest fear is the pensions revolution lacks the fundamental roots to tackle the need to provide people with a secure pension and guide the next generation to a better financial future. A solution could be to put in place a far-reaching financial education programme to build the financial capability of our children – tomorrow's workforce.
The savings challenge for the next generation is not just about investment returns and tax-efficient savings wrappers. It is about engagement and education. We must talk to them and encourage them to make full use of the savings schemes available. http://pension-drawdown.co.uk/invest
Lifetime Allowance & Auto Enrolment
Are you at risk of exceeding your lifetime allowance?
Everyone with a pension in the UK is subject to something known as the Lifetime Allowance (LTA). This is the maximum amount of money you can accumulate in your pension pot(s) without triggering an extra tax charge. The current LTA has just been reduced to £1m.
Why the change?
The reduction was announced by Chancellor George Osborne in his recent 2015 budget and was done so because the old £1.25m lifetime allowance was ‘unsustainable' according to the Chancellor, and by reducing it will not affect 96% of the population, only the 4% of very top earners being affected.
Surely it won't affect me - I'll never be able to save £1m into my pension pot
You'll be surprised. Younger people especially have the potential to be affected by the reduction in the Lifetime Allowance. Take for example, a 21 year old earning the minimum wage. If that person works fulltime and puts 20% of their earnings away every month, they could easily have reached this limit. This could be somewhat offset by the fact that George Osborne has now linked the LTA to inflation, but consider that the young person could be earning substantially more than the minimum wage as they get older and you can see that it will affect more and more people as time goes on. In fact, it could very well affect more and more people who are now in the middle of their working lives. If you are in your 40s or 50s and have contributed to a pension since age 18 then you may have built up a substantial pension pot. From 2012 if your employer is subject to the automatic enrolment duty under the provisions of Pensions Act 2008 they will automatically enrol you into a qualifying workplace pension scheme. If and when this happens then these further contributions to a pension via Auto Enrolment may unwittingly tip you over the Lifetime Allowance. In those circumstances, it may be necessary to have a thorough review of your pensions.
If I think I may be affected, what can I do?
The first thing to do is take advice from a specialist pensions independent financial advisor, who can make the necessary calculations to check whether you are likely to be affected by the reduction in the LTA. There are various options but they will depend upon the exact amount of your pension pot, the scheme you are in, your age, lifestyle expectations and numerous other factors to decide the best course of action. It's because of this complexity that professional advice is a must to ensure you make the right decision for you and your circumstances.
Jonathan Walker's achievement
On Sunday 10th April the Sunday Times published their first supplement listing the Top 250 IFAs in the UK based on reviews on the independent consumer ratings website VouchedFor.co.uk. We are proud, but not at all surprised, to say that Jonathan Walker was featured.
To be included Jonathan was highly recommended by 20 of his clients. All had rated his services over 4 stars out of 5, which is a fantastic achievement. We'd like to thank all of the clients who took the time to share their positive feedback on VouchedFor.co.uk.
Adam Price, Founder of VouchedFor.co.uk: commented "At VouchedFor we're passionate about helping people find great financial and legal advice. At certain points in life the majority of us would benefit from expert help with complex issues such as pension planning, securing a mortgage or for advice on a legal issue. Listing professionals alongside verified reviews from their existing clients makes it easy to find a respected and trusted expert like Jonathan to help. We would like to congratulate Jonathan on being one of the Top 250 - it's a great endorsement of the service Jonathan provides at The Pension Drawdown Company"
You can see his reviews by going to https://www.vouchedfor.co.uk/financial-advisor-ifa/torquay/24046-jonathan-walker.
In these volatile and sometimes tricky times, it's reassuring to receive positive endorsements from clients. This one came in today and it did make me smile.
"I have just opened the portfolio valuation dated 4th April. It would seem that you DO know what you are doing. What a good decision to move everything to the Pension Drawdown Company. I may even recommend you to friends!"
Altmann: "Create a culture where it pays to save"
I see that the pensions minister Baroness Ros Altmann has added her approval to the Chancellor's Budget announcement of more measures to encourage saving at all ages and improvements for guidance and advice. It is good to see that earlier in the month the milestone of 6m workers have now signed up for a workplace pension. Whilst some may see this as a burden now, it will provide much need flexibility for them in the future and will mean less reliance upon the State pension which is being pushed further and further into old age.
Allowing employers £500 tax and national insurance relief, instead of the £150 if they arrange advice, and consulting on the pensions advice allowance are important steps towards helping more people plan properly for later life. All of these changes reinforce the Government's commitment to supporting savers and creating a culture where it pays to save.
With this in mind, don't forget that if you are thinking of topping up your ISA before the end of the tax year on April 5th, time is running out so you need to act quickly, call us if you need advice, you may be able to use our on-line facility.
Spring Budget 2016
It's business as usual for pension saving as the Chancellor confirmed there will be no imminent changes to pension tax relief. And the introduction of the new Lifetime ISA saving vehicle from April 2017 adds another attractive complementary option to the savings landscape.
Taken together with cuts in CGT rates, new ISA limits, further boosts in income tax thresholds and some welcome tidying-up of pension anomalies, it's been a good Budget for savers. Anything that encourages the 50% of the population that don't save or do not have savings, to start putting something away, is to be applauded. Time to celebrate with a fizzy drink before the price rises.
Following on from my comments
Following on from my comments about Final Salary schemes on 19 February, I see that some of the weekend papers were picking up on this story again.>
To further illustrate the difficulties faced by some of these schemes, last week we received an enquiry from a female client from the Midlands who has a British Home Stores (BHS) pension. Her length of service was only a few years so her pension fund is only worth a modest £45,000. However, due to under-funding, and a shortfall in assets to back it up, for her to transfer out, the BHS pension fund will impose a whopping 28% penalty. This means that the transfer value is reduced to £32,400.
Is this fair to the individual, or fair to the remaining savers within the fund? Whatever you think, The Pension Protection Fund could be quite busy over the coming years.
Countdown to the Budget
March is traditionally Budget month. There has been much speculation on what the Chancellor is going to do (if anything) to square the circle of needing to make £35bn in pension benefits cost savings whilst still enticing individuals to save for their retirement.
Currently pension savers are given tax relief at the point of saving and during accumulation and they are taxed when they start withdrawing funds.
The Treasury has been consulting on new options for awarding pensions tax relief over the past few months, suggesting it may want to change the current system to one similar to ISAs. This would see pension savings taxed before they reach the pension pot and tax-free at withdrawal. A third, and some think the preferred option, is to introduce a flat rate of tax relief for all. As often happens in a Budget, there may also be some unexpected (and unwelcome) surprises too.
Whatever happens, if you are a higher rate tax payer earning more than £42,000pa, then potentially you only have a couple of weeks left in which to act to safeguard current levels of tax relief. But don't leave it until March 15th, the day before the Budget as many providers are reporting that thousands of savers are rushing to move their money into pensions so they will need time to process your cheque.
Pensions can be fiendishly complicated, surely if the Chancellor is serious about encouraging savers to plan for their retirement then instead of moving the goal-posts, he should be looking to make the whole process simpler and clearer.
Can you really rely on your final salary pension?
I suspect that few of you have taken much notice of the occasional press comment around the massive deficits in some of the country's top company final salary (defined benefit or DB) pension schemes. Well here's one from Pensions World to think about...
‘The aggregate deficit of the 5,945 schemes in the Pension Protector Fund 7800 Index is estimated to have increased over the month to £304.9 billion at the end of January 2016. This is up from an estimated £46.4bn at the end of January 2014. There are 4,923 schemes in deficit and 1,022 schemes in surplus'.
Recently, the Financial Times reported that BT Group, BAE Systems and International Airlines Group are among a number of large UK-listed companies to have come under renewed criticism over the size of their pension deficits. BT, the telecoms company, tops a list of FTSE 100 companies ranked by the size of their pension deficits, which is the difference between what a pension fund must pay out to retirees (liabilities) and its assets. BP, Shell, Tesco and Royal Bank of Scotland also appear in the top 10 whereas Marks & Spencer's pension fund has recently returned to surplus.
The general public at large is blissfully unaware of the uncertain nature of their defined benefit pensions. Many are smugly pleased that they have a final salary pension, but millions would be clamoring for action if only they knew that their pensions were at risk. I would add that the deficits are not necessarily the fault of the companies concerned – for years investment returns have been lower than expectations and with ever increasing age longevity, this has put a significant strain on the ability of these funds to keep producing the goods. Whilst companies have pumped billions into their schemes to tackle the deficit, there are still a significant number of FTSE 100 companies for which the pension scheme represents a material risk to their business. This is something that members of final salary schemes need to keep an eye on and consider just how secure and ‘guaranteed' these schemes are. Of course there is always the option for some to transfer out of a final salary scheme but the benefits of these schemes should not be abandoned lightly. Cash Equivalent Transfer Values (CETVs) are currently at the higher end of the scale but these are set to fall if and when interest rates start to rise. If you are thinking of transferring your pension then there are attractive alternatives on the market such as Aegon and Met Life's Guaranteed Drawdown plans. These provide the certainty of income like a final salary scheme but with the added advantage of the potential for any remaining capital in the fund being passed onto beneficiaries upon death (unlike a final salary scheme). Before taking any action though, it is vital that you seek independent financial advice.
(The Pension Protection Fund's main function is to provide compensation to members of eligible defined benefit pension schemes, when there is a qualifying insolvency event in relation to the employer, and where there are insufficient assets in the pension scheme to cover the Pension Protection Fund level of compensation. The Pension Protection Fund is a statutory fund run by the Board of the Pension Protection Fund, a statutory corporation established under the provisions of the Pensions Act 2004).
Advice or guidance?
Pensions minister Ros Altmann made a very good point this week that she is concerned ‘people don't understand what advice means' when they make decisions about their pensions, and called for greater clarity. Speaking at a Trades Union Congress (TUC) about workplace pensions, Ms Altmann said the public were not aware what advice meant when it came to dealing with their pension. ‘Many people don't understand what advice means in a regulated sense,' she said. The public needed greater clarity to understand what advice and guidance could offer. 'People need more clarity on what is advice and what is guidance and what they can both do for you,' she said. Altmann was addressing the confusion that has risen since the introduction of government-backed guidance services to support pension freedom rules last April.
The government established Pension Wise to provide guidance to people who wished to access their pension before they turned 55.The face to face guidance is provided by the charity Citizens Advice, and over the phone guidance is provided by The Pensions Advisory Service. Meanwhile the separate Money Advice Service also offers financial information and guidance online. Two of these services have the word 'advice' in their titles but none of them provide regulated financial advice. Altmann said she was concerned people did not understand the difference between these services and regulated advice. 'We have the Money Advice Service and Citizens Advice Bureau, which don't offer advice. But who actually understands that?' she said. She echoed concerns raised by the Work and Pensions Committee of MPs in a report published last October into guidance and advice following pension freedoms.
In the report the committee recommended the government and Financial Conduct Authority introduce a greater distinction between guidance and advice.
The Treasury's response to the report confirmed it would look at making this distinction clear as part of the upcoming financial advice market review.
We think it is really very simple. Guidance is what you can do and advice is what you should do. More often than not, you have to tell people what they can do, before you can tell them what they should do. Furthermore, guidance may be free but advice is usually chargeable.
So what will the new rate be? This could range from 20%, 25% or 33% depending on how much money the Treasury is looking to save. Whatever the new rate is, higher rate tax payers should review their pension contributions and consider topping them up before the tax benefits start to erode. Talk to us or your financial adviser about this.
There's talk that in his March 16 budget...
There's talk that in his March 16 budget, George Osborne will announce a major shake-up of pension taxation. It is widely expected that he will introduce a flat rate of tax relief for all pension savers. The Treasury is apparently working behind the scenes with sharpened pencils to finalise the details as I write this. A flat rate of relief would replace the current system in which tax payers receive relief at the highest marginal rate of tax they pay; so basic rate tax payers get relief of 20% on their pension contributions, and higher rate tax payers enjoy 40%.
So what will the new rate be? This could range from 20%, 25% or 33% depending on how much money the Treasury is looking to save. Whatever the new rate is, higher rate tax payers should review their pension contributions and consider topping them up before the tax benefits start to erode. Talk to us or your financial adviser about this.
Reduction in the lifetime allowance - take out protection
There's been a great deal of coverage on pensions in the press this weekend - particularly in the Money section of the Saturday Telegraph and we would like to draw your attention to some of them.
The Lifetime Allowance will be reduced from £1.25 million to £1 million from 6 April 2016. Many middle income earners will be potentially affected by this change and may well be eligible to apply for Individual Protection 2014 or 2016 depending on the amounts already invested in their pensions. If you have already reached the £1.25 million level you should consider stopping funding your pension and applying for Fixed Protection 2016 to protect your Lifetime Allowance at £1.25. If you pay more than £1.25 Million into your pension then you will be subject to a Lifetime Allowance charge of 55% on any excess. http://www.telegraph.co.uk/finance/personalfinance/pensions/12109710/1.5-million-savers-face-55pc-pension-tax.html
Maximise your pension contributions to take advantage of tax relief ahead of potential reductions
If you're not close to your Lifetime Allowance then there is a one-off opportunity to maximise contributions to your pension this year because there are two pension input periods this year - effectively giving your two annual allowances - so you could pay up to £80,000 into your pension this year. Using Carry Forward from previous years means you could pay even more into your pension this year and this may be your last opportunity to benefit from higher rate tax relief on contributions, as rumours are rife that pension tax relief will be reduced to a flat rate or even completely removed in the Chancellor's Spring Budget Statement. http://www.telegraph.co.uk/finance/personalfinance/pensions/12115198/52-days-left-of-66pc-pension-tax-relief-boost-This-is-what-you-need-to-do.html
What a difference a couple of days can make!
After sharp falls in the markets earlier in the week stocks are up, there's a huge rally in oil which is back up to $31 a barrel, quite a roller-coaster week! So where next for the markets? There are so many diverse messages coming out - top investors were expecting further falls in U.S. stocks. George Soros warned a China hard landing will deepen the rout in stocks. On the other hand, Heather Arnold, director of research at Templeton Global Advisors Ltd says the gloom has gone too far and European stocks are expected to end the year 20 percent higher according to the average strategist estimate compiled by Bloomberg. Some experts already think that the pessimism may have been overdone. "For instance, the global economy is growing around 3%, and whilst China's economy - which is the focus of so much of the recent sell-offs - has slowed, there's still growth, strong consumption, and indeed the world's second-largest economy does look relatively stable," says Nigel Green, chief executive of the advisory De Vere Group. China will keep intervening in its equity market to "look after" investors and has no intention of further devaluing the yuan, Vice President Li Yuanchao said.
The only certainty amongst all this is that there will continue to be uncertainty. Our message remains consistent though – now is not the time to panic, markets do go up and they do go down so sit tight and ride out the storm. This demonstrates the importance of having a cash buffer.
Revealed: The top three watchwords in pension liberation
Since Government reforms became effective last April, the threat posed by unscrupulous pension scammers has grown. Here are three words that you should be wary of if your are approached about your pension.
Legal Loophole - If anyone tells you there is a "legal loophole" that allows you to access part or all of your pension before the age of 55, and that there will be no tax to pay, they're lying and you should disengage immediately, said Angela Brooks of ACA Pension Life, a campaign group currently trying to recoup pension losses on behalf of savers.
Sophisticated Investor - Red flags should be hoisted when being told you are a sophisticated investor or you could be taught to become one for the purposes of accessing your pension, , Brooks said. 'Sophisticated investor' is a term used to describe more experienced investors and it involves getting a certificate needed to be able to invest in unregulated, alternative products. Being unregulated, these products do not afford you protection from the ombudsman of Financial Services Compensation Scheme, so you would lose all your money if things go wrong.
"If you are told you can transfer your pension free of charge, make sure you find out exactly what the long-term charges entail. There is no such thing as ‘free'," said Brooks. Typically pension transfers will involve charges for advice, if taken, as well as asset management charges, which should be explicitly stated. There will also be a tax implication as only 25% of your total pension savings are tax-free to withdraw.
My message is beware of unsolicited approaches and make sure you take professional advice from a reputable adviser.
I see that the Financial Conduct Authority (FCA) has said it will support a move of Pension Wise towards providing a more personalised service for its clients.
Pension Wise is the government's free at-retirement guidance provider that was introduced in the wake of the Pension Freedom reforms to help consumers make informed decisions at point of retirement.
The government's reforms introduced many savers who would have previously bought an annuity to new complex products such as income drawdown. Pension Wise is not allowed to give personal recommendations, which would be classed as financial advice and come under stricter rules. However, MPs argued in a report out last October that the service needed to be given more freedom to help consumers avoid the next "major mis-selling scandal".
In its response to the report in January the FCA told MPs it was in favour of widening the service and hinted at the possibility of adapting its rules.
The New Year has started with a jolt with the FTSE 100 index down by over 4% already. There is a mixed economic outlook, but with various good things to report this is not a time to panic. The stock market is likely to quickly regain its losses before the next bout of volatility.
Tensions in the Middle East plus a Chinese slowdown could cause the oil price to fall further in the weeks and months ahead. With the FTSE 100 index still having considerable exposure to the resources sector, such commodity price falls could cause the stock market to drop further as well. It should be put in context that the Chinese rate of growth is merely slowing down and China is not going into recession. Measures put in place by the Chinese authorities are aimed at reducing domestic gambling. The price of Brent crude continues to fall meaning oil prices are at an 11-year low. It should be borne in mind that the low price of oil is intrinsically linked to higher growth potential for the world.
In the UK, businesses remain optimistic heading into 2016 as demonstrated by a record rise in tax return submissions. Business optimism and growth in the private sector grew at the end of 2015 - 2,044 people decided to submit their tax returns on Christmas day!
Now that 2015 is behind us, we can reflect on a mini revolution in pension drawdown kick-started by the Pension Freedom legislation of 2014.
This is already creating more choice for pension investors and we are pleased that pension providers are responding with new and innovative products. We would like to endorse the contribution made by the Pensions Minister, Ros Altmann. Although she sometimes gets caught in the firing line, she has nonetheless championed pensions by bringing them to the fore and by achieving reductions to charging structures and transparency and simplicity around costs for the ultimate benefit of pension holders.
There is still a lot of work to do but judging by the number of enquiries currently being generated via this website many more people are waking up to the fact that in order to get the best deal for their hard-earned pension savings, they really need to take quality financial advice.