Category

Pensions

Billions Wiped Back onto Pensions

By | News & Views, Pensions | No Comments

This was not a news headline, nor will it be a headline we will ever see.

Yet this is exactly what happened on Tuesday this week.  The FTSE100 had its biggest rise ever, and the Dow Jones in the US went up by more than 11%, the biggest daily gain since 1933.

Our news doesn’t report this.  Good news doesn’t sell, sadly.  Sensationalist, bad news is what we hear when billions are wiped off the value of our pensions.  No big deal apparently when billions are added to our pensions.

Are we out of the woods?  We don’t know – it seems unlikely, as the economies of the western world have shut shop for three weeks, minimum.  We would be surprised if we don’t see further volatility in the days and weeks ahead, but who knows?

Tuesday’s rises demonstrate one thing very clearly, that is, when markets move, they often move very fast, and very unexpectedly.  Trying to time it is very difficult; we would say it is impossible, without a lot of luck.  It’s why we stress to all our clients that it’s time in the markets, not timing the markets that matters.

Many people have been asking, are markets at their lowest, have they bottomed out?  Who can say? The truth is, no one knows with 100% certainty.

What is absolutely certain is that shares in the great companies of the world are available for purchase at a significant discount from six weeks ago.  Also, it’s worth highlighting, with a high degree of confidence (although not certainty), that the price of shares in the great companies of the world will be higher in five years than they are now.  That’s all that matters; all else is noise and distraction.

One last point, knowing how the news reports on capital markets does make me wonder how good or bad things really are when it comes to other world events.  Perhaps, worthwhile, switching off the news!

As ever, please do get in contact if you need our help.  Our great team will do its best to help us all get through this together.

Please note that past performance is not a guide to the future, the value of an investment and the income from it could go down as well as up. You may not get back what you invest.

 

Raising The Pension Age to Combat High Withdrawal Risk

By | News & Views, Pensions, Retirement | No Comments

There is a world of difference between retirement and taking the benefits from a retirement plan.   

Retirement describes a point in time when you might stop work and instead live a life without the commute or the daily grind of office politics.  Retirement is a point where you spend the bulk of your time doing the things that you want to do, rather than the things that you have to do! 

If you have a personal pension plan, you can take the benefits from that plan without having to stop work.  Soit’s probably more appropriate to call this a benefit age rather than a retirement age. 

The current minimum benefit age for a personal pension plan owner is age 55.  Some might consider this a rather young age to be taking benefits from a retirement plan; after all, with steadily increasing longevity, a 55-year-old might have to make their pension pot last 30 years, or even longer. 

Since the introduction of pension freedoms in 2015, some commentators are concerned that pension plan owners might have been taking too much too soon from their plans and therefore risking that they might run out of money later in life. 

High withdrawals are, of course, real risk and one that should not be dismissed lightly.  An imperfect storm of falling investment values and excessive rates of withdrawal can quickly run the value of a pot down. 

One solution currently being debated is to increase the minimum age at which benefits can be taken from a personal pension plan.   

Already it is planned that the minimum age at which personal pension plan benefits can be accessed is to be aligned with the State pension age which is set to rise to age 66 from October 2020 and age 67 by 2028 and 68 by 2039. 

The age at which benefits could be taken from a personal pension will rise to 57 by 2028.  There is a call to consider introducing the increase to age 57 now, in fact, in next week’s Budget statement. 

If we trust people with their pension pots, they are no longer compelled to buy a guaranteed income in the form of an annuity; then I think we should continue to trust them to spend their pension pots wisely from age 55. 

Our experience has been that the vast majority of people are sensible in the way in which they take their pension plan benefits. 

The flexibility that they enjoy, a higher income now knowing it will possibly be lower later is an essential part of how they can plan their financial future and get what they want out of life, now. 

Some may already be approaching age 55 with plans to use their pension pot wisely; it would be wrong to deny them that opportunity. 

Photo by Dwayne Hills on Unsplash

Are you a ‘Pension-Preneur’?

By | News & Views, Pensions, Retirement | No Comments

It’s no secret that the nature of retirement is changing.  What used to be considered by many as a quiet, relaxing time in life, is increasingly becoming a period of greater activity – perhaps it’s a new retirementality.

 

New research from Charter Savings Bank reveals that, instead of taking it easy, millions of those approaching retirement are planning to reinvent themselves and start their own business.

 

The study surveyed 2,005 adults living in the UK between 11 and 15 October 2019.  These 3.5 million so-called ‘pension-preneurs’ across the UK have already started their own business or are planning to do so.  At the same time, some want to invest in another business during their retirement.

 

The nationwide study reveals that 14% of over-50s have entrepreneurial plans for the years ahead.  Of these, 2.2 million people have already set up their own business or have invested in another.  While a further 1.6 million are planning to do so.

 

Pension-preneurs collectively invest about £22 billion in their enterprises, equating to £6,300 per person over 50 years old.  15% are planning to invest more than £20,000 in their new enterprise.

 

The majority of the over 50s plan to use their own personal savings to fund their new business in retirement, but 11% plan to use a lump sum from their pension.

 

Other options for financing include loans from family and friends (8%) and business loans (7%) for their new venture.

 

It appears there are millions of people heading towards retirement who don’t want to just stop working and put their feet up.

 

The most popular plan is for retirees is to volunteer with an organisation or start a charity (33%), while a fifth (22%) plan to start a new job part-time.  Setting up as a freelancer or consultant during retirement is another popular option (12%).

 

Paul Whitlock, Group Managing Director, Charter Savings Bank said,

 

“The fact that so many people over the age of 50 want to create a new business or invest in one is inspiring and shows such an entrepreneurial spirit.”

 

“However, starting a business takes funds and the fact that so many people plan to use their own personal savings to do so highlights how important saving is.”

 

“Whether spending one’s retirement travelling the world or starting a business, saving as much as possible from as early as possible is vital.”

 

Professional services (13%); education (12%); hospitality & leisure (12%); and wholesale & retail (9%) are the most popular industries for pension-preneurs planning to start their own business.

 

Over a third (37%) bravely plan to start their new venture in a completely different industry, while almost half continues in the same industry they’ve worked in during their working life.

 

Are you planning to be a ‘Pension-preneur’?

 

Photo by Joel Filipe on Unsplash

UFPLS – difficult to pronounce, easy to understand

By | News & Views, Pensions | No Comments

If you have saved in a private pension plan (such as a Personal Pension Plan, Stakeholder Pension Plan or a Self-Invested Personal Pension Plan) and have attained at least age 55, then a UFPLS is something you might consider.

UFPLS stands for “Uncrystallised Fund Pension Lump Sum” which is government jargon describing one of the ways that you might take benefits from your plan.  Imagine you have saved hard over time and accumulated a pension pot of £100,000.  You have decided to start to take the benefits from that plan.

While it is called a pension plan, it doesn’t have to be about retirement.  There is no reason why you cannot take the benefits from a pension plan and continue to work.  You do though need to consider the income tax consequences of doing this.  Part of your “pension pot” typically 25% (or £25,000 in our example) can be taken as a tax-free cash lump sum. You can do what you wish with this money; spend it, save it or give it away, perhaps to help the next generation onto the property ladder.

The rest of the pension pot (£75,000 in our example) is subject to income tax at the marginal rate of income tax that you pay.  If you have no other income, then £12,500 in the current tax year (2019/20) is inside your personal income tax allowance and escapes income tax entirely (although the HMRC tax system is such that when you take that benefit, it may well be subject to income tax and you may have to claim it back!)

You might decide to take some of your entitlement to a tax-free cash lump sum (you don’t have to take the whole amount in one go) and combine it with some of the taxable element (even if you don’t pay tax on it).

This approach is referred to as an Uncrystalised Fund Pension Lump Sum, a bit of a mouthful but better remembered perhaps if you think about it as taking your benefits in instalments, or phased retirement.

What you don’t take as a lump sum remains invested in your pension pot for the future.  Other alternatives you might consider include;

  • Deferring taking any benefits until a later date;
  • Just taking some or all of your entitlement to a tax-free cash lump sum;
  • Buying an annuity, which provides a guaranteed income for life; or
  • Flexible access drawdown where you take as much or as little as you like from your pension pot.

Your current pension plan provider may allow some, or all of these; alternatively, you may choose to transfer your pension pot to a new plan that facilitates these options.

Taking flexible benefits such as a UFPLS can be very useful. For example, if you are a few years away from receiving your State Pension or other pension benefits, and you want just enough for early retirement.

We recommend you seek professional advice before you make a final decision on which options are best for you.

Photo credits to drmakete lab on Unsplash

Pensions revisited

By | News & Views, Pensions, Retirement, Tax Planning | No Comments

New pension reforms came into being on 6thApril 2015.  The materially greater freedoms that now exist have much appeal, yet they come with greatly increased complexity both in understanding and in execution.  On balance these reforms were and still are welcome, but the need for high quality advice has never been greater, both to minimise the risks, but also to maximise the opportunities that they provide.

The British have had a love-hate relationship with pensions for many decades.  After some years in the doldrums, the cycle is on the upswing – or certainly deserves to be – largely due to recent changes made by the Chancellor.

Continuously moving goalposts

Successive governments have always tinkered with the pension regime.  Until George Osborne stepped in, the nanny state – not trusting someone to spend money from their pot responsibly in retirement, despite having been responsible enough to save for retirement in the first place – dictated how much money could be withdrawn from a pension, and forced retirees to hand over their hard-earned pot of money to an insurance company (forever) in return for an income for life in the form of an annuity.

Enter the Chancellors April 2015 reforms so let’s have a look again at the rules which were introduced:

Change 1: Freedom to take out as much as you like, when you like

Prior to April 2015, the amount that could be withdrawn from a pension portfolio was limited by the Government (using a calculation related to 15-year gilt yield), unless the individual had £12,000 of secure income such as annuities, state pension or defined benefit pensions.  This withdrawal limit was abolished and, from age 55, retirees are free to take as much as they wish, when they wish.  They will, of course, be required to pay tax on these withdrawals, beyond any 25% tax-free portion, at their marginal rate of income tax, i.e. the highest tax band that they fall into, given all of the income they earn in that tax year.

Talk of retirees depleting their pots and going wild with their cash is both condescending and laughable.  Most people realise how important maintaining their pot is for their future well-being.

It is important that pension pots are not seen as ATM machines! Once the 25% tax-free pension commencement lump sum is taken, all withdrawals are taxed at the pension holder’s marginal rate of tax.  As such, the tax consequences need to be calculated carefully, before any money is withdrawn.

Change 2: No requirement anymore to buy an annuity

Thankfully, another of the central pillars of nanny state influence was abolished; retirees are no longer required to buy an annuity.  They will be free to make the decision that is right for them.  For some that may still be to buy an annuity now or delay the purchase until a date of their choosing.  For others it will be taking out money, also known as drawdown in pension jargon, from their pension pot at a sensible rate.  The important issue is that retirees are now in control of that choice and can seek guidance from their financial planner on what the best course of action might be for them.

Change 3: Pension pots can be passed on to anyone

Perhaps one of the most material changes that the Chancellor made was to allow pension pots to be handed on to anyone, on the death of the member.  Prior to April 2015, a pension could only be passed on tax-free if death occurred before 75 and the plan member had not begun taking an income from the portfolio or taken the tax-free cash allowance.  Outside of this narrow definition, any assets withdrawn suffered a usurious ‘death tax’rate of 55%, unless donated to charity.

From 6thApril 2015, if the plan member dies before 75, any income withdrawals or lump sums are tax free, provided the plan has been passed on to the ‘successor’ i.e. the person inheriting the plan within two years.  If this transfer is delayed beyond two years, then they will have to pay income tax at their marginal rate on any withdrawals.

If the member’s death occurs after 75, then the beneficiary can take either a lump sum or draw down the money flexibly at any time.  Where income is taken, this will be taxed at the successor’s marginal rate of tax.  Lump sum withdrawals are also taxed at the successor’s marginal rate of tax.

As pension pots usually fall outside an individual’s estate for inheritance tax planning, the astute reader will quickly see that these new arrangements allow for some sensible and legal intergenerational tax planning, in certain circumstances. Professional advice should always be taken as a matter of prudence when making any such choices.

Change 4: Private sector defined benefit pensions can be transferred

The new regulations also allow for those individuals with private sector defined benefit pensions to transfer the lump sum value of their pension into a defined contribution pension (e.g. a self-invested pension plan or SIPP).  However, they are required to take professional advice before they do, unless the fund is below £30,000[1].  It may seem tempting to transfer assets however at Wells Gibson we start from the assumption that a transfer will be unsuitable.  Again, help from a trusted adviser is essential.

Conclusion

The pension reforms should continue to be welcomed.  Yet, despite their positive contribution to flexibility, and fairness, they also bring increased choices for individuals around contribution levels, the timing and quantum of pension withdrawals and their use as tax-efficient intergenerational asset transfer opportunities.  These decisions are complex and important to the future financial well-being of clients and their families and should not be taken lightly.  It is hard to think of a more obvious area that a good financial planning firm can add material value to its clients than by empowering them to make informed decisions on what to do with their pensions.

If you want to find out more or talk to us about these or any other pension issues, please do not hesitate to call.