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Retirement

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.

2018 Autumn budget and pension tax change speculation

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With the summer holidays drawing to a close, the inevitable round of speculation about pension tax relief changes in the Autumn Budget has begun.

Media reports suggest that Chancellor Philip Hammond has his eyes on cuts to higher rate tax relief on pension contributions when he presents his Budget statement to the House of Commons in November.  The Chancellor has a challenging Budget ahead, with a desperate need to find extra funding for the NHS, the £20bn already pledged by the Prime Minister.

According to an unnamed senior government minister, Hammond believes higher rate tax relief on pensions represents ‘one of the last remaining pots of gold we can raid’.  This suggestion will worry higher rate taxpayers who currently enjoy this generous tax relief on their pension contributions.

As things stand, basic rate relief is added to the pension pot, with the ability for higher rate taxpayers to reclaim the difference between basic and higher rates of income tax through self-assessment.  However, the unnamed government source is also reported to have said Hammond is only likely to target those who can afford to contribute tens of thousands of pounds to their pension pots each year.

Pension tax relief is always under threat in the Budget, if media reports leading up to the big day are to be believed.  The last major round of speculation was a couple of years ago, when then Chancellor George Osborne had his eye on £1.5bn of tax savings by changing pension tax relief to a flat-rate.

Lending weight to the speculation on this occasion is a Treasury Committee report, published last month, which concluded existing pension tax relief was neither an effective or well-targeted way of encouraging people to save into pensions.  Despite recommending the Treasury considered making fundamental reform to pension tax relief, the report recommended that the current system could be improved through further, incremental changes to tax relief.  According to the report, ‘Household finances: income, saving and debt’:

“The government should consider replacing the lifetime allowance with a lower annual allowance, introducing a flat rate of relief, and promoting understanding of tax relief as a bonus or additional contribution.”

Cutting the pension annual allowance is an option on the table for Hammond.  The annual allowance is a limit on how much you can contribute to your pension each year, while still receiving tax relief.  It currently stands at £40,000 but is tapered down to as low as £10,000 for higher earners with earnings exceeding £210,000 a year.  For those who have taken taxable income flexibly from their pensions, a Money Purchase Annual Allowance (MPAA) of £4,000 applies instead of the £40,000 figure.  In any case, your earnings in the tax year need to be sufficient to justify the size of the pension contribution, with opportunities to bring forward any unused annual allowance from the previous three tax years – unless that is, the MPAA applies to you.  This ability to carry forward unused annual allowance could also be attacked in the Autumn Budget, changing to a ‘use it or lose it’ approach, similar to use of Individual Savings Account (ISA) allowances in each tax year.

Should the Chancellor decide to cut the annual allowance in his Autumn Budget, to a yet unknown figure, he might give back the abolition of the lifetime allowance as a concession.  The lifetime allowance is a limit on the total value of pension benefits you can draw from all pension schemes, either as lump sums or retirement income, without it triggering an extra tax charge.  Since April 2018, the lifetime allowance has been set at £1,030,000 and is due to increase at the start of each tax year, in line with price inflation.  A relatively low number of people are caught by the lifetime allowance, and many of those who will be, are entitled to a higher lifetime allowance figure by virtue of applying for ‘protection’ certificates when it was historically set at a higher level.  For some of those individuals with lifetime allowance protection certificates in place, this entitlement to a higher lifetime allowance came at a cost, that is, not being able to make any future pension contributions, or losing that protection and seeing more of their pension benefits being subjected to a future tax charge.

Abolishing the lifetime allowance entirely would be a popular move for those fortunate to have this level of pension benefits, even if it came with a corresponding reduction in the annual allowance.

Another possibility is the Chancellor will scrap the current system of pension tax relief, replacing it with a flat-rate tax relief.  Earlier this year, the Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA) put forward the case for a flat-rate of pension tax relief at 30%, specifically as a way to help the self-employed.  They estimated this reform would leave three-quarters of savers better off, including those earning low incomes and the self-employed.  It would also save the Treasury a great deal of money each year in tax reliefs.

Of course, the one pension perk where conspiracy theories circulate ahead of each Budget is pension tax-free cash.  Since tax-free cash was renamed the ‘pension commencement lump sum’, it has seemed fair game for the Treasury to place a cap on how much lump sum can be taken tax-free, or simply subject all cash withdrawals from pensions to income tax charges.  This form of attack on pensions seems far less likely than a cut in the annual allowance or even the introduction of flat-rate pension tax relief.

Other potential opportunities being considered for the Budget will undoubtedly include cutting tax breaks on smaller company investing, which could spell bad news for higher-risk, tax planning products such as Venture Capital Trusts and Enterprise Investment Schemes.

If you find yourself potentially worse off should the annual allowance be cut, ability to carry forward unused annual allowance removed, or pension tax relief changed to a flat-rate, then taking some action ahead of the Budget could make sense.

Talk to Wells Gibson about your options, and we can help you understand the impact of any of these changes on your own long-term financial planning and in particular, your desired lifestyle and goals.

What is the Financial Services Compensation Scheme and how does it protect my money?

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When things go wrong, it’s reassuring to know there’s a safety net in place.  This is especially important when it comes to our personal finances, including savings, investments and insurances.

The Financial Services Compensation Scheme (FSCS) is an independent body set up by the UK Government to provide compensation or some other form of resolution for people where their authorised financial services provider gets into financial difficulties.  The FSCS operates different levels of compensation for different products and funds selected.

For insured products, the cover is 100% with no upper limit applied. This category of FSCS protection includes workplace pensions (including Additional Voluntary Contributions/AVCs, Group Personal Pensions and Group Money Purchase Plan), Personal Pension Plans, annuities, endowment policies and Investment Bonds.

For investments, the protection level is also 100% of the loss, but with an upper limit of £50,000 per person.  Financial products falling into the investment category for FSCS purposes include Unit Trusts, Open Ended Investment Companies and Stocks and Shares ISAs.

There is no upper limit for FSCS protection in respect of general insurance policies, but only 90% of the amount is covered.  General insurance includes policies like your car or home insurance.

Finally, and perhaps most discussed in the news media, are bank and building society deposits. These receive FSCS protection of up to £85,000 per person, per authorised deposit group.

It’s also worth noting that, since 3 July 2015, the FSCS provides a £1million protection limit for temporary high balances held with your bank, building society or credit union if it fails.  Temporary high balances include things like the proceeds from a house sale or a redundancy payment.

One aspect of FSCS protection which often raises questions from our clients is how it would apply to the assets held within a Self-Invested Personal Pension (SIPP).  A SIPP is a type of ‘wrapper’ which can include a mixture of the different products covered by the FSCS.  These products can be insurance, investments or deposits.  The result being that each ‘sub-element’ of the SIPP (e.g. OEICs, Life Funds, Cash Account) is usually subject to its own FSCS protection up to the relevant product limit.  The SIPP wrapper itself is protected under the FSCS up to £50,000 per person, per authorised firm.  The investments within the wrapper are protected depending upon the structure of the product i.e. Insured, Investment, General Insurance or a Deposit.  This can mean that the products held within a SIPP can be protected up to a maximum of 100% with no upper limit but can also be limited to £50,000, depending on its FSCS category.

What is important to remember is fund managers typically appoint a depositary, custodian or other organisation, the purpose of which is to help ring-fence invested money from that of the fund manager and therefore help protect the invested money in the event the fund manager is insolvent.  As a result, if the investment provider managing the investment funds within your SIPP was to get into financial difficulty, the FSCS would cover you up to £50,000 per investment organisation.  However, the likelihood of this occurring is extremely remote as the assets are ring fenced from the investment manager.  This means that, if the investment provider became insolvent, the administrators should not be able to access client funds to meet any of the parent companies’ obligations.  In addition, UK authorised fund managers operate internal risk controls to help ensure that client assets are managed with proper care and diligence and within regulatory rules and guidance.

If you have any questions about FSCS protection levels for the various financial products you hold, please do get in touch.