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Month: June 2022

It’s Not What You Earn, It’s What You Keep

The potential impact on your expected retirement income over time

When you’re planning your retirement income, there are multiple factors to consider: how much you can expect from the State Pension, the value of the pensions you have accumulated in your working life, your projected outgoings and your potential later life expenses.

One more factor not to overlook is how much of your retirement income you could lose in taxes. The amount you pay to HM Revenue & Customs (HMRC) may be more than you expect, leaving you with less to cover your regular expenditure.

New data highlights that retired households lose nearly 14% of their income a year to direct taxes. Income tax and council tax take 13.9% off the average retired household’s pre-tax income of £31,674. Retirees are also impacted by around £4,078 a year in direct taxes.

Taxes payable in retirement

Once you retire, you’ll no longer need to pay certain taxes, such as National Insurance. But other taxes are still applicable, including Income Tax. You’ll pay Income Tax on any taxable income you receive above your personal allowance (currently £12,570, tax year 2021/22). Taxable income includes your State Pension (currently up to £9,339 if State Pension age is after 5 April 2016), income is withdrawn from your workplace or personal pensions, and income from other sources, such as part-time work or rental income from buy-to-let properties. There are also other taxes you might not have factored into your budget, such as Council Tax.

Different sources of income

If you have different sources of income, you may end up with several tax codes, which tell your employer or pension provider how much tax to deduct. Don’t assume these are correct – HMRC does make mistakes. You should receive coding notices with details of your tax codes before the start of the tax year. It’s a good idea to check these are right and if you think there’s a mistake, or if you’re not sure, contact HMRC.

The first time you take a lump sum (apart from the tax-free lump sum) from a defined contribution pension scheme, it’s likely you’ll be charged too much tax. This is because most initial lump sum payments are taxed using an emergency tax code. This means you’re taxed as if you made the same lump sum withdrawal every month of the tax year. You can claim back overpaid tax.

Tax on your savings

The way your savings are taxed doesn’t change when you retire or reach State Pension age. Banks and building societies now pay savings interest without any tax taken off but, depending on your situation, you may still have to pay tax on some of your savings income.

An effective tax plan is a crucial part of planning for retirement and can help you make the most of your financial resources. It’s always important to consider the amount of after-tax income you’ll earn. Remember: ‘It’s not what you earn, it’s what you keep.’

Increasing your retirement income

Before you retire, there are various ways to boost your retirement income in the future. You may be able to increase the State Pension you’re entitled to claim by filling any gaps in your National Insurance contributions record. If you haven’t taken advantage of them, you may have tax-efficient savings options, such as Individual Savings Accounts (ISAs). Within an ISA you pay no UK tax on income or capital gains. Paying less tax could mean higher returns for you (and less work if you need to complete a tax return).

And you can also plan the most tax-efficient way to access your pension from age 55 (57 from 2028 unless your plan has a protected pension age). Taking money from your pension plan is a big decision, and when and how you do it can have significant impact on how long your savings will last. So, when the time comes, it’s important you feel confident you understand your options and how your decisions might affect the tax you pay and how long your money will last.

Life beyond work

Defining your retirement goals and what you think you’ll require in terms of income can help shape your plan and how much you will need. To discuss your requirements, please contact us – we look forward to hearing from you.

A pension is a long-term investment not normally accessible until age 55 (57 from april 2028). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future. You should seek advice to understand your options at retirement.

Market Update June Monday 27th 2022

Equity markets move higher, despite recession uncertainty

The majority of equity markets managed to record a positive week for the first time this month, despite investors’ uncertainty over the prospect of a potential recession. With the equity market still very much in negative territory for the year, and after last week’s sharp declines, markets this week took a breather and found support, perhaps an indication that the selloff had gotten slightly ahead of itself.

That said, investors remain concerned by an aggressive monetary policy tightening path which could exacerbate an already slowing economy, stoking fears of a recession. US Federal Reserve Chairman Jerome Powell told Congress on Wednesday; recession was a “possibility” as he reiterated that the central bank is “strongly committed” to bringing down inflation.

In particular, economic data this week made for disappointing reading. The Flash US Purchasing Managers Index (PMI), a survey of economic activity, showed the US economy slowing sharply in June to its lowest reading in 16 months. The index registered 51.2 indicating that economic activity is still growing, however the reading has dropped from 53.6 in the previous month. Meanwhile the Eurozone PMI also fell to a 16 month low, with a reading of 51.9 for June, well beneath estimates of 54.

As of 9am London time, over the week the US market managed to rally 3.29% with the US technology index leading the way, up 4%. Gains in Europe were more modest with the main index up 0.58%, whilst the UK market was up only 0.38%, weighed down by the underperformance of miners and energy companies in the index, after commodity prices fell this week. Markets in Asia also finished strongly with the Hong Kong index and Japanese index rising by 2.89% and 1.6% respectively.

Inflation remains stubbornly high in the UK

Much like the US or Europe, UK inflation shows no signs of abating. The latest year on year reading this week showed prices had risen 9.1%, the highest rate in 40 years, with food and energy prices the biggest drivers of inflation. The Bank of England has warned inflation could peak at 11%. The squeeze on the cost of living has encouraged workers and unions to push for higher pay rises, and this was best illustrated by strike action by Railway workers this week, bringing trains across the UK to a standstill.

Recession fears prompt a rally in core government bonds…

With markets now turning their attention from entrenched inflation to the possibility of recession, safe-haven assets rallied accordingly. As of 9am London time, the US 10-year government bond yield (which moves inversely to its price) fell 16 basis points from 3.22% to 3.06%. The sharp fall in bond yields were also followed in the UK and Europe. Equivalent 10-year German bund yields fell by 27 basis points to trade at 1.39% whilst UK gilt yields fell by 21 basis points to finish the week at 2.28%.

But Commodities pare it’s gains

Commodity prices on the other hand declined this week, as a global slowdown could see weaker demand of oil and industrial metals. Iron ore prices slumped by 8% on Monday, whilst copper is down 6% for the week as of 9am London time. The price in oil also subsided with Brent crude oil down 2.76% to trade at $110 per barrel. Gold prices remained more stable, with the price of the precious metal down 0.5% to $1,831 per ounce.

Reappraisal of Urban Living

Three million people in the UK aged over 50 considering relocating

The coronavirus (COVID-19) pandemic has led to a reappraisal of urban living, with increasing numbers fleeing city confines in search of green space. Three million people aged over 50 (12%) now plan to relocate in retirement, as a direct result of the pandemic. A year of lockdowns has motivated these over-50s to want to move closer to family and friends, pursue a better quality of life or even move abroad.

Retirement migration hotspots

In 2020, the Office for National Statistics revealed that people of retirement age in England were already leaving major urban areas and instead moving to rural areas, locations by the coast or to Areas of Outstanding Natural Beauty (AONBs). The data demonstrated that Dorset, Shropshire and Wiltshire were ‘retirement migration hotspots’, while England’s largest cities saw net outflows of retirement-age residents, with London, Birmingham and Bristol seeing the largest number of exits. Nearly a year on, the research has found that the pandemic has influenced some over-50s to plan a move after a year of lockdowns. Over-50s want to relocate to somewhere that offers a better quality of life (7%), to move close to friends and family (4%) or to live abroad (3%).

Freeing up property wealth

When planning a move, many over-50s consider how the value of their current home plays a role in their long-term plans. 1.3 million pre-retirees over 50 (9%) see themselves as more likely to turn to their property wealth to fund their lifestyle than before the pandemic. In instances where people are relocating, they may downsize to free up property wealth. When considering relocating to a new area, make sure your new home is as future proof as possible. It’s important to think carefully about the type of property you choose and whether it will suit you for the long term. Is it accessible or could it be easily renovated to meet your needs in the future?

Challenges of the pandemic

Understand how a new area might impact on your living costs – consider any difference in living costs between areas and whether, overall, you are likely to spend more money, or save money, in your new location.

Relocating in retirement was already a well-observed trend, with older people reprioritising their needs as they enter the next stage of their life. As with many aspects of our lives, the challenges of the pandemic seem to have led many people to take stock of their current living situation.

Better quality of life

There can be many benefits to relocation, whether it is a better quality of life, more space or the opportunity to be closer to loved ones.

One thing that is clear is that many people will also see their decision informed by how their property wealth factors into their long-term financial planning.

Looking to make a life-changing decision?

As with any big, life-changing decision, it’s important to spend time reflecting on the reason (or reasons) you want to move right now and the impact on your finances and future plans. Let us provide our insights into such a move – to discuss your requirements, please contact us.

Market Update June Monday 20th 2022

Markets fall further whilst inflation has yet to peak, triggering a more urgent response from central banks

Following the high inflation print in the US last Friday, with the consumer price index coming in at 8.6%, markets sold off once more this week as fears rose that the already narrow path to a soft economic landing just got a whole lot narrower. Speculation on Monday that the US Federal Reserve (Fed) would raise rates by 0.75% came to pass on Wednesday, as the Fed raised rates to 1.75% (range 1.5% to 1.75%) and signalled that there was a high probability of a similar increase at its July meeting. This was followed by the Bank of England raising rates by 0.25% to 1.25%, and the Swiss National Bank increasing rates by 0.5%, its first rise in fifteen years.

As of 12pm on Friday, London time, US equities fell by 6.0% over the week, with the US technology sector dropping 6.1%. European stocks lost 3.6%, whilst the UK market fell by 3.0%. Japanese equities were down 5.5% and Australian stocks declined by 6.6%. Emerging markets fell by 4.4%, although domestic Chinese stocks managed to buck the trend, rising 1.0%.

Government bond yields, which move inversely to price, rose as markets priced in higher future rate expectations, with US interest rates now expected to hit 3.6% by the end of the year. Intraweek, 10-year yields on US Treasuries rose to 3.49%, a level not seen since 2010, before settling back down to 3.22%.

ECB convenes an unscheduled meeting as indebted Eurozone countries’ borrowing rates spike higher

German bund yields touched 1.89% although, more worryingly, the more indebted Eurozone countries have seen their yields back up even more. Italian yields reached 4.18%, which is a yield spread above German bunds of 2.4%, with Greece suffering a similar fate as yields rose by 2.9% above Germany’s. Not oblivious to the dangers for the Eurozone, the European Central Bank (ECB) convened an unscheduled meeting and announced that they would speed up work on a new “anti-fragmentation instrument” to tackle widening borrowing costs, although few details are known at present. Following this, the yield premium countries such as Italy and Greece are suffering fell, with the Italian yield premium now standing at 1.9% and 2.3% for Greece.

Bitcoin falls by close to 70% since its November peak

The price of gold fell by 1.5% as rate expectations in the US rose, with the precious metal now trading at $1,848 an ounce. In many respects it has been a similar, although magnified story for Bitcoin, which has fallen by close to 70% since its peak in November. One bitcoin is now trading at $21,100, a fall of 22% over the week. However, it remains 185% higher than where it traded at the start of 2020.

Industrial commodity prices moderate on rising risk of recession

As the risk of recession from rising rates increases, so the value of industrial commodities fell. Copper dropped by 3.9%, now trading at $9,080 whilst crude oil prices also moderated, with Brent crude falling by 1.9%, now trading at $119.7 a barrel.

Financial futures

Gen Xers expected to face significant challenges in retirement

With many Gen Xers (those born between 1965 and 1980) having entered the job market too late to benefit from final salary pensions, yet too early to benefit from schemes such as auto-enrolment, this group is expected to face significant challenges in retirement if policymakers fail to respond urgently.

There are currently 14 million Gen Xers in the UK – 1 in 5 of the total population. With the ongoing COVID-19 pandemic putting additional strain on finances, the case for policy action becomes urgent.

N0 pension provision

Research by the International Longevity Centre UK (ILC)[1] finds that self-employed Gen X workers are five times more likely to have no pension provision than other workers due to a lack of access to traditional pension schemes.

The report on the impact of longevity, finds that self-employed Gen Xers (those born between 1965 and 1980) are at high risk of facing inadequate income in retirement. This is in part due to self-employed Gen Xers being more likely to face periods of low or insecure pay, alongside a more general lack of incentives to save.

Impacted by COVID-19

While the adoption of auto-enrolment into pension schemes, for example, has been highly successful in supporting many employees to start saving, there haven’t been similar initiatives to support the self-employed, and people in this group can’t rely on contributions from an employer to top up their pension pots.

Self-employment, including in the gig economy, is on the rise among Gen X workers. While overall, 19% of Gen Xers say they struggle to save for retirement due to insecure earnings, this is more than double for those who are self-employed – 44%.

The research, based on a nationally representative YouGov survey of 6,035 people, identified self-employed Gen X workers have been further impacted by COVID-19, with 39% reporting spending their savings or saving less due to the pandemic.

Flexibility during hard times

In the report, ILC call for policymakers urgently to offer an equivalent to auto-enrolment to the self-employed – but in a way that offers more flexibility during hard times – by giving this group the option to save into a Sidecar Savings Scheme (as well as a traditional pension).

This would enable savers to pre-commit to regularly put money into an accessible savings account, and once these savings have reached an agreed target – which ensures they have sufficient savings for a ‘rainy day’ – to automatically transfer any additional payments into a pension.

Variable or insecure pay

Many Generation Xers don’t have adequate pension savings in place and, sadly, this financial vulnerability is exacerbated if they are also self-employed. Many people who are self-employed are likely to face periods when they are on variable or insecure pay, but there is also a worrying lack of incentive for them to save for their financial futures.

With self-employment and the gig economy on the rise, it’s vital that saving for retirement is encouraged and more easily facilitated for these workers and we would welcome any moves by policymakers to introduce an equivalent auto-enrolment scheme for the self-employed, which we know has worked so well for employees.

1.The findings are ILC calculations based on nationally representative YouGov survey responses of 6,035 UK adults aged 40-55 (collected online between 13-24 November 2020). The survey was carried out online. The figures have been weighted and are representative of all UK adults aged 40-55.


Market Update June Monday 13th 2022

China easing of Covid 19 restrictions fails to deflect from monetary policy tightening concerns

Most equity markets finished the week in negative territory as the news that China started to ease its Covid 19 restrictions gave way to continued fears over monetary policy tightening in the face of stubbornly high inflation. On Friday the latest US consumer price index is due for release, with forecasts of inflation remaining at 8.3% over the year to May, in line with April’s data. Markets are pricing in US interest rates to hit 2.8% by the year-end, versus the current rate of 1.0% (range 0.75% to 1.0%) and exceed 3.0% next year.

This is against slowing forecasts for economic growth, with the OECD (Organisation for Economic Cooperation and Development) lowering global forecasts down to 3% from their previous forecast of 4.5%, made in December due to the war in Ukraine and higher energy prices. Normally central banks are tightening monetary policy into strengthening growth, therefore the risk of stagflation (rising prices, slowing growth and rising unemployment) is that much greater in today’s environment.

Chinese stocks one of the few bright spots in equity markets

As of 12pm London time on Friday, US equities fell 2.2% over the week, with the US technology sector falling by a similar level. European equities dropped 2.8% as even the European Central Bank (ECB) signalled that rates could be back above zero for the first time in a decade by their September meeting. This is against a backdrop of inflation running at 8.1% in the Eurozone, four times the target level of 2.0%. UK stocks fell 1.9%, as the country was ignominiously singled out by the OECD as most likely to suffer from stagflation next year.

The OECD forecasts the UK to have the weakest economy in the G20 outside of Russia in 2023. The Japanese market rose by 0.5%, helped by a sharp devaluation in its currency, the Yen, as the Bank of Japan is one of the few central banks not expected to raise rates anytime soon with inflation currently running at 2.5%. Although this is remarkable in itself in a country that has battled with deflation for many years. Australian stocks fell sharply, as the market lost 4.2% over the week.

Emerging markets rose 0.6%, although this was primarily down to Chinese stocks which rose following the relaxation of Covid restrictions, as the state media announced on Sunday that public transport and restaurants would reopen in Beijing. The domestic Chinese ‘A’ share market rose 2.8%, whilst offshore Hong Kong stocks gained 3.4%. The Latin American subsector of the emerging markets fell by 5.3%, not helped by the US dollar strength.

Government bond yields resume their upward momentum

Government bond yields, which move inversely to price, rose over the week, with the 10-year US Treasury yield rising to 3.03%. Similarly, German bunds rose to 1.41%, and UK gilts climbed to 2.31%, levels not seen since 2014.

Crude oil nears this year’s peak following the Russia Ukraine invasion

Gold fell 0.3%, now trading at $1,845 an ounce, whilst Brent crude rose to $124 a barrel, taking it perilously close to the peak experienced just after Russia invaded Ukraine when it hit $128 a barrel.

Issues under discussion

Inflation once more concerns the market

The market is preoccupied with inflation once more, with concerns that stubbornly high inflation will require central banks to tighten monetary policy to a level that triggers a recession. And whilst we cannot rule out a further higher spike in energy prices, triggered by the Russia-Ukraine war, as time moves on, given that inflation is a year-on-year comparison, it becomes increasingly likely that it will at least start to moderate.

Research published from the Leuthold Group this week suggests that, since 1940, although inflationary spikes tend to trigger a recession almost half of the time, once inflation has peaked, the stock market tends to rise regardless of whether a recession occurs.
So, while it is still too early to call a peak in the inflationary cycle or a bottom in the stock market, it is not all doom and gloom and there are good reasons to start to become constructive on markets.

Gender Pension Gap

British women impacted at every stage of career

The staggering impact of the gender pension gap has been revealed in research which shows that women have lower pension pot sizes in every age bracket, with the situation significantly deteriorating as they approach retirement.

Pension pot sizes

The research highlights that there is always a difference in pension pot sizes between genders, even at the start of men’s and women’s careers. This initial gap (17%) remains largely unchanged until men and women reach their thirties, but doubles to 34% by the time they are in their forties.

The gap increases to 51% in the fifties age bracket, and then to 56% at retirement. The analysis also reveals that the difference in size of pot has a significant influence on the choices being made at retirement. 92% of women choose to take their pension in cash compared to 86% of men, while only 7% of women consider a drawdown compared to 12% of men.

Investment earnings

The issue is compounded by the fact that even in sectors where women are more heavily represented in the workforce, the pension gap remains just as stark. For example, in the Senior Care sector, the research shows that 85% of pension scheme members are women, yet the average woman’s pot size is 47% smaller than the average man’s (£8,040 current male average pot size).

Defined Contribution (DC) pensions have grown substantially in recent years, with the introduction of auto-enrolment. DC pensions are a retirement plan in which the employer, employee or both make contributions on a regular basis. Individual accounts are set up for participants and benefits are based on the amounts credited to these accounts plus any investment earnings on the money in the account.

Career progression

However, much like the gender pay gap in wages, the gender pension gap is fast becoming an issue. This analysis reveals the extent of the gender pension gap in the UK – a gap that exists right from the very beginning of a woman’s career and accelerates as she approaches retirement. The decision to take a career break to raise a family has a clear impact, though there are a number of other factors at play here, including lower pay relative to male peers at all stages of a woman’s career, a lack of pension contributions when she is away from the workplace, and the potential impact that raising a family has on a woman’s career progression.

Financial struggles

The research shows women are also more likely to face financial struggles following a divorce from their partner and are significantly more likely to waive their rights to a partner’s pension as part of their divorce. This is particularly true for older women, with one in four divorces occurring after the age of 50.

Changing social and workplace attitudes should help begin to level the playing field in terms of responsibilities, helped by the increasing acceptance of more flexible working patterns. The gender pay and pension gap is a complex issue that will take time to solve.

It’s never too soon to start thinking about the retirement you want

Whether you’re saving for retirement or planning your life now that you’ve retired, receiving professional financial advice can be hugely important in order to maximise your savings and avoid costly mistakes. To discuss how we could help you, please contact us for further information.

A pension is a long-term investment not normally accessible until age 55 (57 from april 2028). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future. You should seek advice to understand your options at retirement.

Market Update June Monday 6th 2022

Stocks withdraw from last week’s rally

Stocks relinquished a part of last week’s solid gains as investors remained to doubt whether the Federal Reserve will be able to suppress inflation without triggering a recession. Industrials shares were the standout, assisted by an increase in Boeing.

Volatility continued to maintain since its recent peak in mid-May, although cautions from JPMorgan Chase CEO Jamie Dimon that an economic “hurricane” was on the horizon due to rising interest rates and increased commodity prices appeared to unsettle some investors on Wednesday. A report Friday that Elon Musk had emailed fellow executives that Tesla may have to lay off 10% of its workforce—and that he had a “super bad feeling” about the global economy—also seemed to unnerve investors to some extent. US Markets were closed Monday in observance of Memorial Day.

On the other hand, the week’s economic data had minimal effect in promoting concerns of an imminent recession—specifically one fueled by layoffs. On Friday, the Labor Department disclosed that employers added 390,000 nonfarm jobs in May, well over consensus expectations of around 320,000.

Inflation may have come to a head, however, Fed’s course remains unclear.

Inflation signals were arguably more challenging to decode, as were remarks from Fed officials about the prospective long term implications of rate hikes – comments were watched vigilantly given the Fed’s upcoming “blackout” period ahead of the June 14‒15 policy meeting. Some belief developed that the Fed may pause rate hikes at its September meeting to assess their imprint to date on the economy, and Federal Reserve Vice Chair Lael Brainard mentioned on Thursday that financial conditions had already been firmed significantly—while caution that policymakers may still raise rates by half a percentage point in September.

Global markets

A spike in eurozone inflation data and news that the European Union will ban most Russian oil imports by the end of this year aided in driving Treasury yields up at the start of the trading week, while belligerent policy motions by the Bank of Canada brought in greater pressure to shorter-term U.S. interest rates.

European shares tumbled in low volume as the UK market closed early to commemorate Queen Elizabeth II’s 70th year on the throne. Investors remained to grasp with worries about increased inflation, lagging economic growth, the rate of central bank policy tightening, and the invasion of Ukraine seeing the FTSE 100 Index declining 0.69% through Wednesday. The STOXX Europe 600 Index ended the week 0.87% lower. Major indexes were generally weaker. Germany’s DAX Index was barely altered, CAC 40 fell 0.47% in France, and FTSE MIB lost 1.91% in Italy.

EU settles on partial restriction on Russian oil; Russia severs gas supplies to the Netherlands

European Union (EU) leaders established that at the end of the month, there would be a prohibit to all seaborne Russian oil deliveries, encompassing about two-thirds of such imports, within months. Hungary, Croatia, Slovakia, and the Czech Republic—countries that depend drastically on Russian energy supplied via pipelines—were excused temporarily from the embargo. Part of the restriction also includes a coordinated restriction with the UK on insuring ships carrying Russian oil. Earlier, the European Commission revealed a €300 billion plan to finish the EU’s reliance on Russian energy imports before 2030.

Subsequently, Russia’s state-owned energy company Gazprom closed off gas supply to the Netherlands, the fourth country to be sanctioned for declining to pay in rubles rather than dollars. Russia cut off supplies to Finland, Poland, and Bulgaria earlier in the month.

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