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Retirement

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.

 

 

 

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!

State pension age equalisation is here

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State pension age equalisation has taken place in the UK.

The gradual change now means that women qualify for their state pension from age 65, the same age as men.

State pension equalisation has taken a long time, 25 years in fact.  During that time, the age rise for women was gradually phased in, with women celebrating their 65th birthday on 6th November 2018 the first to qualify for a state pension at the same age as men.   Despite equal ages for state pensions, equality of retirement income remains a long way off.  Maike Currie, Investment Director at Fidelity International said:

“The pension system is relatively equal if people follow the same working pattern from age 20 to retirement, but they don’t.  Women are more likely to have fragmented careers, be self-employed or work flexibly during their working life as they continue to bear the brunt of the childcare or take a career break to care for sick or elderly relatives.

“Of course, these factors are increasingly affecting men too, however, the average women’s pension pot is already much lower than the average man’s so women need to have the ability to catch up. As the Cridland report pointed out, in the first year of retirement women are expected to have 25% less income than their male counterparts.”

The final report from the Cridland Review was published last year and made a number of recommendations in respect of the state pension.  Report author John Cridland, a business executive, proposed an accelerated increase in the state pension age.  It is already due to rise to age 68 between 2044 and 2046, having an impact on those born after 5th April 1977.  Cridland wants to see the state pension age rise to 68 between 2037 and 2039, bringing this increase forward by seven years.  As a result, anyone born after 5thApril 1970 would have a higher state pension age.

Further rises in the state pension age seem unavoidable in light of improving life expectancy.  Without a higher state pension age, people living for longer would make the state pension unaffordable for the taxpayer.

The Cridland Review also recommended abolishing the ‘triple lock’ for increasing state pension payments each year.  This currently gives state pensioners a degree of protection from price inflation, with their state pension income rising each year in line with the greater of average earnings, price inflation or 2.5%. Instead of having this triple lock in place, John Cridland proposed that state pensions in the future rise in line with average earnings.

One group who are unhappy with the equalisation of state pension ages for men and women are 1950s born women represented by the Women Against State Pension Age Inequality (WASPI) campaign group.  They are arguing for government compensation after claiming to be unaware their state pension age would rise, as the government did not routinely write to women to let them know about the change.

Your state pension is likely to form an important part of your total income in retirement.  It’s important to understand when you will start to receive a state pension income and how much this is likely to be.  A good place to start is requesting a free state pension forecast at gov.uk/check-state-pension and then speaking to your financial planner to incorporate these figures within your overall plan for retirement income.