News & Views

Pension blind spots can damage retirement wealth

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Did you know you can access your pension pot early in the event of severe ill-health?  According to a new survey of non-retired UK adults, more than half of pension savers weren’t aware of this early access provision.

The research, carried out by Opinium on behalf of the Money and Pensions Service, spoke to 2,008 non-retired UK adults to gain a better understanding of their pension awareness.

They found knowledge was lacking when it comes to contributions during parental leave, tax-relief for the self-employed, and the terms of pension auto-enrolment.  56% of those survey did not know that it’s possible to contribute to a pension while on parental leave.  More women were unaware of this than men, with 61% of women not knowing they could keep on paying, compared with 51% of men.

Nearly two-thirds of those surveyed didn’t know that self-employed people could gain tax relief on their pension contributions.  The picture when it comes to an understanding of pension auto-enrolment was slightly better, with 65% of those surveyed aware that the minimum contribution rates do not guarantee enough will be saved for retirement.

Money and Pensions Service acting chief executive Caroline Siarkiewicz said:

“It’s clear that many people are unaware of their options when it comes to important events in their lives that can impact their pensions such as becoming a parent or starting their own business.

“Women in particular have many important financial decisions to make when transitioning into parenthood but our findings suggest they are less likely to be aware of their pension options.

“However, our findings suggest that many might be missing out on important information when making decisions affecting their pensions.  You can speak to a pension specialist for free, confidential help by contacting The Pensions Advisory Service helpline or webchat.”

To avoid pensions blind spots, the Money and Pensions Service shared three top tips.

Continue to make contributions to your pension while on parental leave.  Check with your employer how this will work.  This will vary depending on whether you are part of a defined contribution scheme or defined benefit scheme.

If you are suffering from severe ill health and wondering what your options are to access your pension, talk to your pension provider.  They will be able to explain whether you are eligible to access your pension early.

If you are self-employed, you could receive tax relief on the amount you put into your pension so it’s worth making contributions if you can.  Further support for self-employed people with their pensions is available through the Pensions Advisory Service who offer a specialist telephone-based appointment service.

Pension blind spots in the form of misconceptions and misunderstandings can be extremely damaging to wealth in retirement.

If you’re unsure about any aspect of the pension system, please don’t hesitate to contact Wells Gibson.

Do you have a clear retirement savings target?

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What’s your retirement savings target?

Don’t worry if you can’t answer this question quickly.  A considerable number of people don’t have a ready answer to this critical question.

According to new research, around 40 million UK adults could be taking their chances when it comes to retirement, admitting they either have not or did not set a savings target.  The research, as part of Sanlam’s “What’s Your Number?” report, is highlighting how a lack of basic knowledge about retirement planning could be damaging our ability to reach future financial goals.

Within the report, it found that more than half of UK adults don’t think they can save enough money to retire when they want to finish work.  Only 12% of under-55s have a specific target for the size of their pension pot.  This lack of knowledge around retirement planning is brought into sharp focus by the fact that four times as many people know their lottery numbers off by heart.

It’s the 45-54 age group who are mainly at risk from this lack of explicit knowledge and goals. Only 18% in this age group, which should be saving at a significant rate, have set retirement goals.

Applied across the UK population, that means that 8.2 million adults are heading into retirement without a clear set of goals.  They could be failing to make the most of some of their most lucrative years of career earnings, undermining the opportunity for a financially secure retirement.

Within the research, there’s a significant gender gap.  Women are particularly exposed to a lack of precise retirement planning.  Only 18% of women have set a financial target for retirement, compared to 29% of men. With women already facing a gender pensions gap, this lack of clear retirement objectives could be especially harmful.

The research discovered that the main aims for retirement were not having to worry about money, maintaining a current living standard, and being free from debt.  Other retirement planning goals include having a regular income and repaying the mortgage before retiring.

So why are we failing to plan for retirement?  Around two-fifths of UK adults don’t see setting targets as being essential for their long-term financial planning, which could explain the complacency.

Jonathan Polin, Sanlam UK CEO, said:

“’What’s your number?’ is a simple question, but the answer is often less straightforward.  The gap between what people think they need and what they actually require in later life is huge, and sometimes life-changing.

“By taking some very simple steps, setting clear financial goals, and identifying a clear path to get there, this nightmare can be avoided.”

It’s hard to understate the importance of having clear goals for retirement savings.  Knowing how much you should be saving each month, to maintain your desired lifestyle in later life, is critical to a successful and fulfilled retirement.

Later life misconceptions and retirement reality

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There are plenty of misconceptions about retirement.

Part of my role as a qualified CERTIFIED FINANCIAL PLANNERTM Professional and Chartered Financial Planner, is to help turn retirement from a series of perceptions into a (hopefully more positive) reality.  An issue with our perception of retirement is that we’re informed by the experiences of our parents’ or grandparents’ generations, or by cliched images of retired couples that appear in the media.

Close your eyes for a moment and picture an image of retirement.  Do you imagine silver-haired couples smiling from the deck of a cruise ship or standing on the golf course?

A quick search of ‘retirement’ on stock photography websites generates plenty of images of wrinkles, walking sticks, and even wheelchairs.

In an attempt to address some of these retirement misconceptions, interactive investor has published their Great British Retirement Survey; a comprehensive study exploring the attitudes and experiences of 10,000 Brits approaching or in retirement.  Rather than reporting retirement as a time of pleasure, almost two-thirds of those surveyed said that financial worries are a big concern at this stage of life.  Does this maybe mean fewer cruises and more time spent searching for bargains in Aldi?

One significant conclusion from the research was a need to address the ‘gender agenda’ in retirement.  This finding shows that men are twice as likely to work into retirement for enjoyment, and women for money.  Meanwhile, retired women were found to be twice as likely as men to say they are just getting by financially.

The survey also found some real positives about the retirement experience.  One in 10 of those surveyed said they felt retirement was the time to resume studying, and nearly a third said they would consider starting a new business or taking up new hobbies.

More than half of those surveyed said they would do some voluntary work for their local community when they retire. More than a third are already doing unpaid voluntary work.

Providing free childcare was another positive outcome for retirement plans, with 18% looking after grandchildren, counting this as unpaid work.

Looking at retirement priorities, one in five of those surveyed said they travel and holidays were their biggest priorities in later life.  This priority was followed by spending more time with family and getting more exercise.

The biggest worries for those already in retirement included the impact of a stock-market crisis, running out of money, tax issues, and not being able to afford to help younger family members with large expenses.

All of these retirement worries can be remedied through the Financial Planning process.  At Wells Gibson, we work with clients to model the financial impact of a stock-market crash (and subsequent recovery), so they can understand what this means for their long-term financial future.

Running out of money is another worry addressed through the lifetime financial forecasting.  By making reasonable assumptions about the future, we can project forward to demonstrate a likely net asset position at age 100.

Tax issues are also dealt with when you work with a Financial Planner.  While tax planning isn’t our primary service, it is part of the value we offer, optimising your retirement plans in light of ever-changing tax legislation.  Also, helping younger family members with significant expenses is a scenario we often model for our clients, to demonstrate the impact of making substantial gifts or loans to the next generation.

What matters when it comes to your retirement planning is what and who is important to you; and your desired lifestyle and financial goals, and not a set of perceptions about what retirement means.

Retirement rule of thumb from new living standards

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It’s hard to picture the future.  Various studies have found that we tend to reward ourselves today, at the expense of our future selves.  This can apply in areas including health, diet (one more doughnut surely won’t hurt?!) and our personal finances.

When it comes to retirement planning, 51% of us focus on current needs and wants at the expense of providing for the future.  Only 23% of people are confident they know how much they need to save.

This new research supports the launch of the UK Retirement Living Standards, which could help people picture their future retirement and what that might cost.  Produced by the Pensions and Lifetime Savings Association (PLSA), the New Retirement Living Standards are pitched at three different levels – minimum, moderate and comfortable.  The standards are based on a basket of goods and services, including food, drink and holidays.  The independent research was conducted by the Centre for Research in Social Policy at Loughborough University.  It was based on the well-respected Minimum Income Standard developed for the Joseph Rowntree Foundation.

In each new Retirement Living Standard, there are different standards of living, with a relevant basket of goods and associated costs for each.  Each was established based on what members of the public feel are realistic and appropriate expectations for living standards in retirement.  The basket of goods is made up of household bills, food and drink, transport, holidays and leisure, clothing and personal and helping others.

These new Retirement Living Standards are a useful way to fill gaps in current approaches towards planning for retirement.  They can form a practical first step on a retirement planning journey.

The PLSA wants the Retirement Living Standards to become a widely adopted industry standard.  For example, some pension schemes will use them in general information for scheme members, in annual benefit statements, or to develop personalised targets for pension planning.

The minimum living standard in retirement has been set at £10,200 a year for a single person and £15,700 for a couple.  These amounts cover the cost of basic needs in retirement, as well as enough to have some fun.  For example, within this budget is enough to holiday in the UK, eat out about once a month, and do some affordable leisure activities a couple of times each week.

With a combination of a full state pension of £8.767.20 a year and auto-enrolment in a workplace pension, this minimum standard should be achievable by most.

The cost of a moderate retirement lifestyle was calculated at £20,200 a year for an individual or £29,100 a year for a couple.  At this level of retirement income, there’s more financial security on offer and greater flexibility.  There’s more money for fun too; the budget includes a two-week holiday in Europe and eating out a couple of times each month.

The comfortable level has been set at £33,000 a year for an individual or £47,500 for a couple.  This income is sufficient to cover some luxuries, including regular beauty treatments, theatre trips, and three weeks in Europe a year.

To make these Retirement Living Standards easier to remember, the PLSA has summarised them as £10,000 a year for minimum, £20,000 a year for moderate, and £30,000 a year for comfortable; or 10k-20k-30k.  For couples, it’s 15k-30k-45k.

Nigel Peaple, Director of Policy and Research, PLSA, said:

“The Retirement Living Standards will support better saver engagement.  They distil robust, in-depth research with the public into an easy to understand basket of goods that helps people picture the future – and relatable figures that can provide a powerful and practical tool for encouraging engagement with saving.

“A recent PLSA survey showed 76% of people with a workplace pension agree that Retirement Living Standards would help them know if they were on track for the lifestyle they want in retirement.

“The PLSA looks forward to working closely with the pensions industry to ensure widespread adoption of the Retirement Living Standards to transform the way people think about saving for spending in later life.”

Guy Opperman, Minister for Pensions and Financial Inclusion, said:

“We have transformed saving for retirement for millions of people and the next challenge is to make it easier for them to engage more with their pensions. It’s great to see what the PLSA has developed which has the potential to help savers think about the future and plan for the retirement they want.”

Jackie Spencer, Senior Policy and Propositions Manager, Money and Pensions Service, said:

“Saving for something is easier to do when you can visualise what you’re working towards, which is why people are often more motivated to save for short-term goals like holidays and new cars than they are for their retirement.

“The new Retirement Living Standards are a great way of offering savers some practical examples of what they can expect from their lives when they stop working. The Money and Pensions Service has agreed to be an early adopter of the new standards and will be looking to incorporate them into pension guidance and our online pension calculator.”

Of course, our income needs in retirement are very personal and will differ between individuals and couples.  While these standards represent a good starting point for thinking about the cost of retirement, it’s essential to tailor the exercise to suit personal requirements.

Brexit and your investment portfolio

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There is always a temptation to play around with an investment portfolio’s structure, in other words, to attempt to position it for potential short-term global events, such as Brexit.

Irrespective of what might happen in the future, including any of the potential outcomes of Brexit, as investors we can rely on a number of truths:  markets work pretty well and are hard to beat, so capturing the market return on offer using lower-cost, well-structured products makes good sense;  spreading our assets broadly to ensure the risks we face are well-diversified will always sit at the core of a successful long-term strategy;  balancing out the risks of shares by owning high quality, short-term bonds provides a good insurance policy;  being patient and being disciplined are fundamental to achieving the returns we need to fulfil our lifestyle and financial goals.

As we are faced with short-term uncertainty, and possible anxiety, over Brexit, let’s focus in on diversification.  There are many ways in which an investor can be diversified, however, owning a portfolio that includes many thousands of companies, all market sectors, spread across developed and emerging economies, reduces the risk of being caught out by material negative impacts in specific markets, such as the UK.  In the UK a few names dominate; the top 10 shares represent more than 35% of the total UK market and the largest, HSBC, weighs in at 5.3% of the broad UK market.

A market-capitalisation weight to shares across all developed and emerging markets shows a very different, well-diversified picture.  The largest listed company in the world is Microsoft at 2.2% of the market.  It is worth noting that Microsoft’s market capitalisation is over US$1 trillion, compared to HSBC’s US$150 billion.  In a global market capitalisation weighted portfolio, HSBC’s weighting is greatly reduced to under 0.5%.  It is astute for investors’ portfolios to hold material allocations to non-UK shares and the majority of companies that this represents.

Sector diversification also makes good sense.  Owning a material allocation of global shares ensures that sector exposures are diversified.  The UK has some large sector allocation differences compared to the world as a whole; in particular it has no major technology companies like Microsoft, Amazon and Google, despite technology shares representing around 15% of global equity markets.  UK exposure to technology shares is less than 3%.  The UK is also materially overweight in the energy and basic material sectors.

If you are a client of Wells Gibson, you will have an investment portfolio which is as well-positioned as it can be to weather Brexit uncertainty and whatever lies ahead.  As a member of the Evidence-Based Investment Solutions group, our recent Investment Committee Meeting in September concluded that, of the thousands of funds available to UK investors, the funds our clients are currently invested in, are all excellently managed and represent some of the best available to give our clients exposure to global asset classes such as short-dated bonds; commercial property; and developed market and emerging market company shares.

Brexit and the political chaos that we see before us, combined with the polarisation of politics between quasi-Marxist policies on the left and populist rhetoric on the right is unsettling for all.  We are where we are, unfortunately, whatever one’s Brexit views or political persuasion.

Please don’t hesitate to get in contact if you have any questions.