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Financial Planning

How Much Do I Need to Retire?

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As financial questions go, my late father regarded this as a big one we all need to answer:  how much do I need to retire?

There are various rules of thumb you can apply so you can answer this big financial question.  As a rough guide, some financial planners might suggest you need enough in your pension pot to provide the equivalent of two-thirds of your salary from employment.

We used to consider a £1m pension pot as the basis of a financially sound retirement, big enough to generate what is needed in later life.  This £1m pension pot rule of thumb would have typically seen the majority of investors through their later years, assuming they didn’t spend excessively, especially during the early years of retirement.  However, in recent years, a combination of factors has prompted a rethink of how much is typically needed in savings, pensions and investments in order to sustain a required level of retirement income.

A big driver of this need for more is that we are, on average, living much longer.  Sadly, my father died at 60.  Considerable improvements to life expectancy were experienced throughout the 20th century, thanks largely to health improvements for younger people, such as immunisations.  Since the 1950s, it has been health improvements for the older population which has driven life expectancy higher.  Back in 1980, life expectancy at birth was 71 for men and 77 for women.  Fast forward to 2011 (the latest year for available statistics) and those ages have risen to 79 and 82.8 respectively.

Of course, these are just averages.  50% of people will live longer than these average ages. Those who engage in the financial planning process, who tend to be wealthier, typically have a better life expectancy than average.  With longer lives comes a need for larger pension pots.

Another factor driving the need for greater retirement savings is the rising cost of living.  One million pounds isn’t what it used to be!  Price inflation might be relatively low at the moment, but even modest annual price inflation over extended periods of time can dramatically increase the cost of

living.  This cost of living increase has exceeded 70% over the last twenty years, pushing up the amount of pension savings you will need to maintain the same standard of living as previous generations of retirees.

In order to keep pace with the rising cost of living in retirement, you need a bigger pension pot.

One more factor driving the need for a bigger pension pot is a lower return from investments.  In the low interest economic environment which followed the global financial crisis, it takes a bigger pension pot to secure the same level of annual retirement income.  Yields on the benchmark 10-year government bond (Gilt yields), which is a widely used reference point for pension annuities, stand at 1.19% today.  Around twenty years’ ago, the yield was 7.4%.

With lower returns from investments today, a larger pension pot is needed to generate the same level of income in retirement.

Despite a trend towards needing a bigger pension pot to afford retirement today, it’s worth remembering that we are all different and have differing financial needs and goals.  It would be wrong to apply a simple rule of thumb and expect to get an accurate answer to this big financial question.

A pension pot valued at £1m will be sufficient for some. Others will need more and £2m worth of pensions, savings and investments will be closer to the target.

The amount you need to save to retire comfortably is going to depend on a range of factors; when you plan to retire, how much income you need, the amount of investment risk you are willing to take, whether you face any health challenges, and much more.

With the help of Wells Gibson, it is possible to quantify precisely how much you need in order to achieve and maintain the life that’s important to you without the fear of running out of money.

My father ran out of life, just make sure you don’t run out of money!

Inheritance Tax (IHT) and the Residence Nil-Rate Band

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Recent changes to Inheritance Tax (IHT) legislation are certainly helping individuals to pay less tax on death, however it’s fair to say the system is slightly more complicated.

Last year, the government introduced a new allowance, the Residence Nil-Rate Band (RNRB) to reduce the impact of IHT on families and to make it easier to pass on their home to children and grandchildren.  The allowance applies where a residence is passed on death to a direct descendant.  The RNRB increased from £100,000 to £125,000 in April 2018 and will rise to £175,000 in tax-year 2020/21 when it will continue to rise in line with the Consumer Price Index.  One thing though, the RNRB cannot exceed the value of the home passed onto children and grandchildren.

The RNRB is different to the existing nil-rate band which applies to everyone and will remain at £325,000 until tax-year 2020/21.  Married couples and civil partners may transfer their assets to one another tax-free and the surviving partner can use both allowances.  This means that couples can pass on up to £650,000 in tax-year 2018/19. However, if the estate includes their home and is to be passed onto their children and/or grandchildren, they can pass on £900,000 when both RNRB allowances of £125,000 are included.  By tax-year 2020/21, they will be able to pass on up-to £1mn in assets tax-free.  Furthermore, the RNRB is available to anyone who has downsized, (or rightsized as we like to refer it as!) or ceased to own a home on or after 8thJuly 2015.

Some complications

Because the RNRB only applies to direct descendants, it does not apply to individuals with no children or to individuals who would like to leave their home to others not regarded as direct descendants.

Another complication is the tapered reduction in the RNRB at a rate of £1 for every £2 by which an estate’s value exceeds £2mn.  However, assets given away in the 7 years before death will not be included in the value of the estate when calculating the tapered reduction – this potentially encourages death bed tax planning to ensure one’s estate falls below £2mn!

Worth also adding that buy-to-let properties do not qualify if they have not been a residence of yours.

Final Thoughts

Despite the RNRB being welcomed by clients and their advisers, the number of individuals with an IHT liability continues to increase.

Estate planning is a key area where Wells Gibson can add value and is a core part of our Wealth Planning service – in fact, there are a wide range of effective IHT planning techniques at our disposal and these include gifting allowances, Potentially Exempt Transfers or PETs, trusts and Business Property Relief-qualifying investments.

As always, if you have questions and would like to discuss IHT further please contact us.

Brexit and your Wells Gibson portfolio

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Whichever way one voted, it is hard not to be dismayed by the shambles that is Brexit, created by all sides. In the event that any deal agreed gets voted down in Parliament, or there is no deal, there is a material chance that the government could fall.  One or both of these events would come with great uncertainty.

Wells Gibson sets out three key investment risks relating to Brexit and three key strategies embraced by Wells Gibson to help reduce these risks.

Risk 1: Greater volatility in the UK and potentially other equity / share markets

In the event of a poorly received deal or no deal, it is certainly possible that the UK equity / share market could suffer a market fall as it tries to come to terms with what this means for the UK economy and the impact on the wider global economy.  A collapse of the Conservative government and a Labour victory would add further uncertainty.

Strategy 1: Diversify globally across equities / shares

Although it is the world’s sixth largest economy (depending on how you measure it), the UK produces only 3% to 4% of global GDP, and its equity / share market is around 6% of global market capitalisation.  Well-structured portfolios hold diversified exposure to many markets and companies.  Changing your mix between bonds and equities / shares would be ill-advised.  Timing when to get in and out of markets is notoriously difficult.  Provided you do not need the money today, you should hold your nerve and stick with your strategy.

Risk 2: A fall in Sterling against other currencies

In 2016, after the referendum, Sterling fell against the major currencies including the US dollar and the Euro.  There is certainly a risk that Sterling could fall further in the event of a poor or no deal.

Strategy 2: Own non-Sterling currencies in the growth assets

In the event that Sterling is hit hard, it is worth remembering that the overseas equities that you own come with the currency exposure linked to those assets.  Remember too that a fall in Sterling has a positive effect on non-UK assets that are unhedged i.e. the investment manager is not using strategies to offset the impact of currency fluctuations. Whereas, the bond element of your portfolio should be hedged to avoid mixing the higher volatility of currency movements with the lower volatility of shorter-dated bonds.

Risk 3: A rise in UK bond yields (and therefore a fall in bond prices)

The economic impact of a poor or no deal and/or a high-spending socialist government could put pressure on the cost of borrowing, with investors in bonds issued by the UK Government (and UK corporations) demanding higher yields on these bonds in compensation for the greater perceived risks.  Bond yield rises mean bond price falls, which will take time to recoup through the higher yields.

Strategy 3: Own short-dated, high quality and globally diversified bonds

Any bonds you own should be high-quality to act as a strong defensive position against falls in equity / share markets.  Avoiding over-exposure to lower quality (e.g. high yield, sub-investment grade) bonds makes sense as they tend to act more like equities / shares at times of an economic and equity / share market crisis.

Some thoughts to leave you with

Even if you cannot avoid watching, hearing or reading the news, it is important to keep things in perspective.  The UK is a strong economy with a strong democracy.  It will survive Brexit, whatever the short-term consequences, and so will your portfolio.  Keeping faith in global capitalism and the structure of your Wells Gibson portfolio, as well as holding your nerve, accompanied by periodic portfolio rebalancing is key.

‘This too shall pass’ as the investment legend Jack Bogle likes to say.

Wells Gibson supporting Financial Planning Week 2018

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What is Financial Planning Week?

Financial Planning Week is a chance for people nationwide to access free financial planning sessions offered by CISI Certified Financial Planners.

This is an opportunity for anyone at any stage of life to book in for an hour long, one-to-one, confidential session between the 3rd-10th October 2018.

The annual campaign, organised by the-not-for profit professional body the Chartered Institute for Securities & Investment (CISI), is a national initiative to help improve the financial fitness of the UK public, while highlighting the fact that CERTIFIED FINANCIAL PLANNERTM practitioners represent the pinnacle of professionalism for their knowledge, skills and integrity. You can also explore the Financial Planning Week website for handy tips and tools on how you can plan well to live well.

www.cisi.org/cisiweb2/fpweekmicrosite/find-a-planner

Click the link above to find a planner near you and book your free session or you can contact us directly.