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Retirement Planning

What happens if you retire without enough?

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If you reach retirement age with insufficient savings, you face several choices.  You might continue working.  Delaying retirement by working longer gives you the option to save more, and means your savings don’t need to stretch quite as far when you eventually retire.

Alternatively, you could reassess your lifestyle and spend less in later life.  Cutting back on expenditure in retirement isn’t always the answer, as some expenses are unavoidable.  For homeowners, one option on the table is to release equity from the value of your property, which can be used to fund your retirement income.

New research by insurer SunLife has found that most people in their 50s have insufficient pension savings to afford a comfortable lifestyle in retirement.  The research looked at the finances of 3,000 over 50s, finding that 21% don’t have any pension savings.  For the 79% in their 50s who have saved for retirement, the average pension pot stands at £146,666.

A recent report from The Pensions and Lifetime Savings Association found that the price of a moderately comfortable retirement is £20,200 a year.  By ‘moderately comfortable’, they mean enough to cover the cost of necessary living expenses and some luxuries, including an annual European holiday.

With the full basic state pension at £8,767 a year for an individual, the balance of £11,433 to reach this moderately comfortable retirement income level would take a pension pot of around £282,000.  SunLife calculated the size of the pension pot based on current annuity rates and factored in a 3% inflation growth a year for the retirement income.

Based on their calculations, this means it would require savings to make up the shortfall of £357 a month from age 50 to age 65. For a 55-year-old, they would need to save £531 a month, and the savings target rises to £876 a month for a 59-year-old.

However, what about if your goal in retirement is more than a ‘moderately comfortable’ lifestyle?  The Pensions and Lifetime Savings Association defined a more comfortable lifestyle, including more than one holiday and more spending on home improvements, at the cost of £33,000 a year.

This means that, for the average size pension pot, a 50-year-old would need to save £1,669 a month to retirement with sufficient savings at age 65.  The target monthly savings rise to £2,492 for someone who is 55 and to £4,125 a month at age 59.

Simon Stanney, equity release, marketing director at Sun Life said:

“According to our research, just 9% of people in their 50s are confident they have enough in savings, investments and pensions to fund their retirement; a further 32% say they ‘hopefully’ have enough with a 36% saying they definitely don’t. A further 15% say they are not sure.

“Obviously the average over 50s’ pension pot is not yet mature, and many over 50s will reach their target by the time they retire, but for others, especially those nearing retirement age, the amount they need to save each month is quite substantial if they are to build up a big enough pot to retire ‘comfortably’.”

At Wells Gibson the primary goal of the majority of our clients’ is, to either achieve financial independence or maintain their desired lifestyle in retirement.  Financial planning is key, so you can visualise your financial future, be less anxious about tomorrow and secure all that you value.

Please contact Wells Gibson if you want to know much is enough.

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.

One option for women still not saving for retirement

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It’s long been known that men are more likely than women to make provision for retirement income.

New research has found that almost a quarter of homeowning women over 55 do not have a private pension of their own.  The research, carried out by insurer SunLife, spoke to 1,000 people over 55 who either own their home, with or without a mortgage. They found that 24% of women said they didn’t have a private pension.  This was compared with just 6% of homeowning men.

The research also found that 22% of over 50s women said they were financially worse off at this stage in life than they expected to be.  Only 14% of men reported being financially worse off than expected.

The reasons for this disparity between financial progress for women and men were varied.  70% of women felt it was the result of the rising cost of living.  47% of women surveyed placed the blame on low-interest rates.  However, 55% of men thought rising living costs were to blame, with 40% citing low-interest rates.

According to SunLife’s research, on average, women over 55 have lived in their homes for 24 years and seen their homes increase in value by around £111,000 during that time.  This amount of property wealth and the absence of private pension provision raises the prospect of equity release as one way to provide income in later life. Simon Stanney, equity release director at SunLife, said:

“Downsizing is an obvious choice when it comes to releasing cash from your property, but our survey shows that 61% of women over 55 do not want to move, with more than half (56%) saying “I love my home and I can’t see myself moving in my lifetime.”

When asked why they didn’t want to move home, the main reason given was it is too stressful, and that the home is just how they want it.  Some said there are too many memories associated with their homes.

When asked if they would consider equity release as an option for releasing cash, one in 34 women over 55 said they already had, and 28% said they would consider it, or already are considering it.  Simon continues:

“While there will be many women who do not have a private pension but will benefit from their partners’, there will still be some women over 55 who simply do not have sufficient means to fund their retirement. However, these women may have a significant amount of equity in their homes.  Many are reluctant to leave their homes, and that is when equity release can offer a solution.”

Anyone considering equity release to help fund their retirement should consider it alongside other financial planning options. However, it’s essential to seek professional financial planning and advice before using equity release or making other irreversible financial decisions, especially in later life.

 

For more information please feel free to contact Wells Gibson.

Lifetime allowance tax could trap more than a million pension savers

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Initially introduced in 2006, the pension lifetime allowance has been gradually reduced from its peak of £1.8m.  For most people, the lifetime allowance in the current 2018/19 tax year is. £1,030,000.  From 6th April 2019, this will increase to £1,055,000, in line with price inflation as measured by the Consumer Prices Index.

It’s an important tax charge to understand, as those with pension benefits exceeding the lifetime allowance have to pay a charge on their excess benefits value.  The lifetime allowance is assessed each time you take a benefit from a pension scheme. At this point, the value of the pension benefit is compared against your remaining lifetime allowance, to work out if the lifetime allowance charge is due.

The value of pensions is calculated differently depending on the nature of the pension scheme.  For a personal pension, it’s relatively simple to compare the value of the pension pot against the lifetime allowance, as both are capital amounts.  For a defined benefit pension, the value is calculated by multiplying the annual pension by 20 to get a capital amount to compare with the lifetime allowance.

Other pension benefits assessed against the lifetime allowance including certain tax-free lump sum benefits paid to your survivors if you die before your 75thbirthday.  There’s also a lifetime allowance check made against any unused pension benefits once you reach your 75th birthday.

A new analysis of the lifetime allowance has concluded that a significant number of retirees could face a lifetime allowance charge in the future.  The analysis, carried out by insurer Royal London, estimates that around 290,000 people already have pension benefits more than the lifetime allowance.  They are forecasting that more than a million people risk breaching the lifetime. allowance by the time they retire.  This follows three cuts to the lifetime allowance since 2010.

When the value of your pension benefits exceeds the lifetime allowance, you can end up paying a 55% charge on the excess above the allowance!

Among the findings from this analysis by Royal London was around 290,000 non-retired people who have already thought to have accumulated pension rights over the lifetime allowance.  Despite holding substantial pension benefits, less than half of these people are thought to have applied for lifetime allowance protection, which can preserve a previously higher lifetime allowance and reduce the tax charge paid.

Royal London also found that almost half of people who already have pension benefits over the lifetime allowance continue to add to their pension wealth, potentially exacerbating the future tax charge.

Among those non-retired people who do not yet have pension wealth exceeding the lifetime allowance, there are an estimated 1.25 million who can expect to breach the allowance by the time they retire.  Those most likely to breach the lifetime allowance include relatively senior public sector workers with long-service, who have defined benefit pensions that will exceed the lifetime allowance. This is especially likely as those in the public sector now have to work until age 65, rather than 60.

Another group likely to get caught in the lifetime allowance trap are relatively well-paid workers in defined contribution pension schemes where they receive a generous contribution from their employer.  Typical salary ranges of those likely to fall into this category are £60,000 to £90,000 a year.  Those earning more are less likely to get caught in a lifetime allowance trap because they face limits on how much they can contribute to a pension each year.

The rising number of people likely to exceed the lifetime allowance in the future is the result of the allowance rising in line with CPI price inflation but wages and pension funds typically rising much faster.  As a result, the lifetime allowance is likely to ‘bite’ progressively more severe over time, affecting hundreds of thousands of people who don’t necessarily think of themselves as wealthy.

Commenting on the research, Steve Webb, Director of Policy at Royal London said:

“This research shows, for the first time, how the drastic cuts in the Lifetime Allowance mean that large numbers of workers will now be caught by a limit that was originally only designed for the super-rich.

“It is shocking that over a quarter of a million people have already breached the LTA and that many of these are still adding to their pensions.  They are likely to get a nasty shock – and a big tax bill – when they do finally draw their pensions.

“And more than a million further workers who are not currently over the LTA could find themselves in breach unless they take action.  This is truly a Lifetime Allowance timebomb.

“Many workers, especially those in Defined Benefit pension schemes, will have little idea that this is an issue and could be heading for a nasty jolt.  The “Government needs to think hard about how to make sure people are aware of these limits in time to make alternative arrangements, and individuals need to take expert advice if they are to avoid potentially huge tax bills.”

There are schemes in place designed to protect your lifetime allowance however before you register for a protected lifetime allowance, it’s essential to seek advice, ideally from a CERTIFIED FINANCIAL PLANNERTM Professional or Chartered Financial Planner.

Please don’t hesitate to contact Wells Gibson if you have any questions.

There’s still time to top-up your State Pension

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Time is running out to top-up your State Pension before a price rise being introduced in April.

Paying voluntary National Insurance contributions can be a financially attractive way to boost your income in retirement.  However, filling these gaps in your National Insurance contribution record, and receiving a higher State Pension in return, is set to become more expensive from 6th April 2019.

If you reach your State Pension age after 5th April 2016, and therefore qualify for the new State Pension system, then you can currently fill any gaps in your National Insurance contribution record at very favourable rates. These concessionary rates are however due to expire on 5th April 2019, making the cost of filling the same contribution gaps hundreds of pounds more expensive.

The first step is to check your National Insurance contribution record for any gaps.  The simplest way to do this is to visit www.gov.uk/check-national-insurance-record and use your Government Gateway check your National Insurance record online.  This online check will tell you:

  • what you’ve paid, up to the start of the current tax year;
  • any National Insurance credits you’ve received;
  • if gaps in contributions or credits mean some years don’t count towards your State Pension (they aren’t ‘qualifying years’); and
  • if you can pay voluntary contributions to fill any gaps and how much this will cost.

Once you have this information, you will need to act before the end of this tax year to fill any gaps in your ‘qualifying years’ to benefit from the current concessionary rates and boost your State Pension income.

As things stand, if you’re covered by the new State Pension system and you have a gap in your contribution record for any year from 2006/07 to 2015/16, you have until 5th April 2023 to fill those gaps.  Despite this generous amount of time to fill the gaps, the current concessionary rates for making voluntary National Insurance contributions will expire on 5th April 2019.

The normal rate for buying back each week of National Insurance contributions will revert to £15 following this deadline.  Different rates are being charged for those acting before 6th April 2019.  In fact, the weekly rate varies from £12.05 for the 2010/11 tax year to £14.10 for 2015/16.

Depending on which gap of your National Insurance record you need to fill, the difference between the ordinary and concessionary voluntary rates of National Insurance contributions could represent hundreds of pounds.  For example, if you want to fill a National Insurance contribution gap for 2010/11, you will save more than £150 by doing so before 6th April 2019.

The potential saving will be more than £500 for anyone wanting to fill six years of contribution gap between 2010/11 and 2015/16.

Before deciding to top up any gaps with voluntary National Insurance contributions, it’s important to check that doing so will boost your State Pension income.  The challenge here is that a rather complex set of transitional rules mean it is not always the case that filling these gaps with voluntary contributions will result in a higher State Pension.

In order to check, you can contact the DWP Future Pension Centre on 0800 731 0175 or by using the online form at https://www2.dwp.gov.uk/tps-directgov/en/contact-tps/fpc.asp.

Commenting on this opportunity, Royal London Director of Policy Steve Webb said:

“For many people, topping up their state pension through paying voluntary NICs can produce a good rate of return because the cost of doing so is subsidised by the government.  

“But the price of voluntary NICs will rise sharply in April so those considering doing so may wish to act quickly and could save hundreds of pounds by doing so.”

Your State Pension is a valuable part of your overall retirement income, so it’s important to maximise this inflation proofed income where possible and affordable.

With this looming deadline to benefit from concessionary rates of voluntary National Insurance contribution, it’s important to take a few simple steps to understand whether you can save hundreds of pounds on the cost of topping up your State Pension income.