Category: Pensions

I was reading an article recently which indicated that one in ten (10%) of those planning to retire this year expect to withdraw their entire pension savings as one lump sum, according to research by Prudential.

The research also suggested a fifth (20%) of people retiring this year would risk avoidable tax bills by taking out more than the tax-free 25% limit on withdrawals.

The study found such people were not necessarily spending all the cash – the main reason given by those taking all their funds in one go was to invest in other areas such as property, a savings account or an investment fund, with almost three-quarters (71%) choosing those options.

Of those planning to spend the cash, the most popular use was for holidays, with a third (34%) planning to spend the money on trips. A quarter (25%) planned to spend their money on home improvements while a fifth (20%) planned to give money to children or grandchildren.

Since the launch of pension freedom in April 2015, more than 1.1 million people aged 55 and over have withdrawn some £15.74bn in flexible payments.

Government estimates have indicated around £2.6bn was paid in tax by people taking advantage of pension freedoms in the 2015/16 and 2016/17 tax years, with another £1.1bn raised in 2017/18.

Prudential retirement income expert Stan Russell said it was worrying so many people planned to withdraw more than the tax-free lump sum limit.

“The risk is even greater for those who are taking all their pension fund in cash,” he added. “They not only face paying more in tax than they have to but also put their long-term retirement income security at risk.”

My question is, did they take advice beforehand?  Dis they consult an Adviser to talk through the ramifications of their actions beforehand.  Based on the reasons given, makes me doubt that.

For example. Why would you take the money out of a pension to invest it – it already is invested and in a tax efficient wrapper!

Of course, everybody is different with different objectives.  But at least discuss these with your Adviser so that you have all the facts to hand before making a decision.

If you don’t already have an Adviser, give us a call.  An informal chat with us might save you a lot on money.

The picture-perfect view of being self-employed is understandably attractive: the notion of being your own boss and doing what you love under your own steam.

In fact, the number of self-employed workers in the UK has steadily risen from 3.3 million in 2001 to 4.8 million in 2017, according to latest figures.

However, recent statistics also show that most self-employed people have little confidence in their pensions and almost half (45%) of self-employed workers aged between 35 and 54 have no private pension at all.

The reality is that your pension is one of the most powerful saving tools available and has many advantages that other saving methods don’t. Therefore, those who are self-employed and not using a private pension could be missing out on a lot of benefits in later life.

To help the self-employed, a pension advice specialist has outlined five reasons why they should take advantage of the power of their pension.

1. Compound interest

Understanding what compound interest is and how it can benefit you will help you stay ahead of your peers when it comes to your savings. Put simply, when you save money it should earn interest. This interest can then earn more interest.

The average investment growth (interest) you get in a pension tends to give your savings more opportunity to grow than other tools, such as a standard savings account or a cash ISA. This boosts the growth you can enjoy from compound interest.

2. Tax relief

Tax relief is one of the greatest USPs of a pension as it immediately increases the value of your contributions, which is then multiplied year after year by compound interest.

For basic-rate taxpayers, when you contribute to your pension the government adds back the 20% that is usually deducted from your earnings. This means that if you add £80 to your pension the government will top this up to £100. Higher and additional rate taxpayers can also claim back the extra 20% or 25% they pay in income tax.

3. Take back control

Being self-employed means you’re in control of many things that your peers maybe aren’t. Saving into a pension can help extend that control to later in life, by giving you more money and income options to choose from than relying on your business or assets like property.

4. Don’t rely on your state pension

Self-employment might mean that you don’t qualify for a full state pension as you pay a different level of National Insurance to those who are employed.

Fully utilising a private pension and the power it gives you will mean you could be in a position where you can be sure that you won’t have to rely on the state pension in the future.

5. History shows us that stock markets work

There’s a good chance that a proportion of your pension is invested in the stock market. And when it comes to stock markets, news headlines are often full of sensationalist doom and gloom. This can understandably cause worry and fuel people’s distrust of pensions.

It’s really important to understand that going up and down all the time is what stock markets do and history shows us that, as a whole, they have always tended to rise over the longer term. The best thing to do is pay as little attention as possible to short-term news headlines and trust decades worth of reality.

I’ve been a sole trader and it can be tough. Well-meaning friends talking about how they wished they had the freedom of being their own boss and ignoring the huge uncertainty that can come with being self-employed. When’s the next job coming in? Will clients pay on time? Will I have enough to get by in the future?

Pensions are extremely powerful and if yours is properly managed you can look to your financial future with much more certainty. And it could mean even more flexibility and freedom when it comes to the choices you have in life.

It just doesn’t make sense to ignore or neglect your pension, especially if you are self-employed. And when it’s so easy to find out how your pension is doing and how to get it working as hard as it can for you.”

Aegon has recently found that 64% of people have more than one pension pot and, of that 64%, 22% have lost track of one or all of their pensions.

The figures published in the report means that over 700 million people have potentially misplaced some of their retirement savings, highlighting the challenge of a broader trend towards a career involving an average of 11 jobs and the difficulty of keeping tabs on workplace savings.

However, the recent survey discovered an improvement in pension awareness in the last two years, with nearly a 10% fall in the number of people not knowing the value of their pensions from 39% to 30%.

Aegon head of pensions Kate Smith said: “It’s very hard to plan for retirement without a full view of your savings and an understanding of what your state pension entitlement is likely to be.

“So it’s concerning that the number of people who have lost track of their pensions has increased slightly. Without the bigger picture people might be setting themselves up for a retirement fall without a clear idea of what their savings are worth. Nowadays the vast majority of jobs come with a pension and as people frequently change jobs it’s all too easy to lose track of your pensions, especially if they are small.”

In a bid to combat the challenge of losing track of multiple pension pots, Aegon has suggested that savers consolidate their savings with one provider. However, the research found that only 27% of people would be interested in this method.

The most common reason for not consolidating pension pots was because savers claimed they did not want “all their eggs in one basket”, representing 46% of respondents. A further 27% of people said that they were not aware of the benefits of moving all their pensions.

“Pension consolidation won’t be right for everyone, there are merits to not keeping all your eggs in one basket. And some older style pensions will have valuable benefits which may be lost on transfer. It’s notoriously difficult for people to keep track of small pension pots, particularly at the beginning of someone’s working life. Consolidation of small auto-enrolment pots along the way will help people keep track of these,” Smith added.

“Looking to the future, the launch of a pension dashboard in 2019 should simplify the process of finding lost pensions, and has the additional bonus of seeing all your pensions, including the State pension, in one place. The hope is that by making all their pensions more visible people will gradually become more interested in pensions, and in time start to make more active decisions to start to get them ready for retirement.”

Pensions Freedoms have presented UK savers with far more flexibility over how they take their pension pots at age 55 and beyond.

But with increasing longevity, the uncertainty over how much the overburdened welfare state will be able to look after the elderly, particularly those needing long-term care, and the government making incremental changes to pensions taxation and the state pension age, people’s workplace pension pots will need to last much longer than many expect.

How can one invest to ensure the fund lasts for the length of retirement, if clients need it to, and how can advisers help mitigate risks such as market and sequencing risk?

You also have to address that perennial problem of suitability, given people’s needs will change over the course of their lifetime?

And as with all advice, every client has different needs, objectives, desires and opinions.  Not only that, but you have to address the desire to take their pension pot (or at least some of it) as soon as they can, leaving themselves short when they eventually retire some five or ten years later.

Don’t be afraid to give us a call and get proper advice before taking the plunge.  Yes it will cost you a fee but it could be worth it in the long run.