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The Golden Years?

Be Better Off In Retirement

Imagine you’re retiring today. Have you thought about how you’re going to financially support yourself, and potentially your family too, with your current pension savings? The run-up to your retirement may feel overwhelming, but this is an important time for you and your savings.

Following the pensions reforms, there are now more options available than ever and this has removed the compulsion to purchase an annuity. It also means that you can use your pension fund to benefit your named beneficiaries, whoever they may be.

Basic Retirement Lifestyle

If you are approaching retirement it’s time to think about what you’re going to do with the money you’ve been working hard to save all these years. The average UK pension pot after a lifetime of saving stands at £61,897. With current annuity rates, this would buy you an income of only around £3,000 extra per year from age 67, which, added to the maximum State Pension, makes just over £12,000 a year – just enough for a basic retirement lifestyle.

In more recent years, when it’s time to take a retirement income, some people are choosing to do so through pension drawdown. Pension drawdown provides a way to establish a flexible income, set at whatever level you choose, which can be increased or decreased over time to match your needs.

Flexibility And Control

For many, this may seem a more fitting solution to their retirement needs than purchasing an annuity, which is a more established option that typically offers a set monthly income for life. However, although pension drawdown offers flexibility and control, there are differences to consider.

While annuity income is fixed for life, pension drawdown can only continue for as long as you have savings remaining – and once they’re gone, you’ll receive nothing. So, it’s important to receive professional financial advice to ensure that you withdraw your money at a rate that will last your expected lifetime.

Will Your Savings Last A Lifetime?

It’s important to consider that your retirement could last for 30 years or more, depending on when you retire and how long you live. This is why some people use pension drawdown as the option to provide their retirement income. Your savings remain invested even after you retire, which means they have the opportunity to continue growing through investment returns.

But it’s impossible to predict exactly how much they will grow each year. Some years they will grow more than others, and some years they may fall in value. If your rate of withdrawal exactly matched your growth rate, your savings could last indefinitely. But, because growth is so hard to predict, this is near impossible to do.

How Much Can You Safely Withdraw?

A 4% withdrawal rate is typically stated as a guide for how much you can withdraw each year from your retirement savings. This figure is estimated based on the history of the financial markets and how much investments have tended to grow over periods of around 35 years (the expected duration of retirement for someone who retires in their sixties).

So, if you have £500,000 in savings when you retire, 4% would initially equate to £20,000 a year. However, there are a few additional details that mean this figure can’t be used totally reliably:

• Past performance of the stock markets cannot reliably predict future growth

• The performance of investments in your portfolio may be better or worse than average

• It’s impossible to know for sure how long your retirement will last

• Your financial needs are likely to change over time, typically peaking in early retirement and then in later life

Changing Pensions Landscape

So, a 4% rate of withdrawal could be either overly cautious, resulting in the accumulation of wealth that could create an Inheritance Tax liability, or overly reckless, resulting in complete depletion of your savings when you still have years left to live. In this world of ours, very little stands still. The same can be said for the pensions landscape. As high earners are faced with even more restrictions and potential pitfalls, it is vital to understand the rules and seek specialist advice. Start talking to us today about your future retirement plans and we can help you make sure it’s a resilient one.

Its important to consider that your retirement could last for 30 years or more depending on when you retire and how long you live. This is why some people use pension drawdown as the option to provide their retirement income.

Generation Xers Chronically Under-Saving

57% Face Financial Difficulty In Retirement Years

According to The International Longevity Centre UK (ILCUK) report, a substantial proportion of Generation Xers (those born between 1965 and 1980) in the UK face financial difficulty in retirement, with one in three expected to face significant disadvantages.

Many 40-55-year-olds are reluctant to invest because they are frustrated by various financial stresses, such as coping with fluctuating incomes and balancing conflicting goals like childcare, loans and mortgages.

Multiple Financial Pressures

Generation Xers are chronically under-saving, with nearly one in three at risk of reaching retirement with inadequate incomes. The majority (57%) say they want to save more for
retirement but they cannot afford to because of multiple financial pressures.

Many are also unaware they are saving too little to achieve the level of income they desire: just 7% of those with a defined contribution (DC) pension are saving enough to achieve a moderate lifestyle in retirement.

No Pension Funds

More than half of those who contribute to DC pensions do so with less than 8% of their wages, and over half have substantial delays in their pension savings of at least ten years.

Of those who are employed, more than a quarter expect to rely on the State Pension for the bulk of or all their retirement money, or have no pension funds at all.

Additional Income In Retirement

COVID-19 has further disrupted people’s retirement plans, with one in five Generation Xers saving less or spending down their savings as a result.

Generation X is a very diverse cohort. Some subgroups in the age band are well prepared for retirement: almost 60% expect to have additional income in retirement, such as property wealth, other investments or savings, an inheritance or income from their partner or family.

High Risk Of Financial Difficulty

But other subgroups are at high risk of financial difficulty in later life, including those on benefits, the self-employed, low earners, renters and carers.

The pandemic has disproportionately influenced Generation Xers: they are the age demographic most affected by the pandemic, with 91,000 more older adults unemployed now than a year earlier. This is a year-over-year rise of more than 30%, and far more than in any other age demographic.

Uncertain About Retirement Plans

According to the ILCUK study, nearly 40% of Generation Xers are uncertain about retirement
plans, and few grasp the rate of investment needed to reach a secure retirement income. The findings of this report are really worrying and highlight the precarious financial future facing some of those in their 40s and 50s. Increased housing costs, insecure work and caring responsibilities risk leaving many without the savings they need for later life.

The pandemic has disproportionately influenced generation xers: they are the age demographic most affected by the pandemic, with 91,000 more elderly adults unemployed now than a year earlier. This is a year-over-year rise of more than 30%, and far more than any other age demographic.

Maximise Your Wealth Potential

Everyone’s situation is unique. This is why a personalised approach is important to help you, and your family, map out your goals and aspirations. Whatever the source of your wealth, there is an opportunity to maximise its potential through professional financial advice. To find out more, please contact us.

Inflation Beaters

How to ensure your money is protected from rising inflation

With current interest rates on cash savings very low, it is difficult to achieve growth above the rate of inflation. And if the cost of living is rising faster than your savings are growing, you’re effectively losing money. With cash savings, a penny saved is a penny earned. But thanks to inflation, over time, the value of the penny saved could be much less than when it was earned. When looking at investments, always focus on what is the real return or the return net of inflation. Over longer periods, well-managed investments usually grow by more than cash. Even if inflation isn’t a worry right now, you should still factor it into your investing strategy. Here we explain in simple terms how to beat inflation.

Consistently Outpaced Inflation

Investments that change in value a lot day-to-day tend to increase in value the most over several years. Investments that change in value a little day-to-day tend to increase by less over several years. So, if it doesn’t worry you to see falls in value occasionally, and you have enough money in other places that it wouldn’t affect your lifestyle, you might target high growth with higher risk investments, for example, a portfolio of equities. Investing in equities over a long period has consistently outpaced inflation.

Lower Risk Investments

Otherwise, you might target just enough growth to beat inflation with lower-risk investments. One example is bonds: loans given to governments and companies that are repaid at a fixed rate of interest. Either way, there is always the risk that you could lose money, so you should keep enough savings separately in a cash account to cover any emergency expenses and short-term savings goals.

Ahead Of Inflation

One good way of staying ahead of inflation is buying stocks that pay good dividends. Dividends are a tangible return paid by companies and keep up with inflation. And just like inflation, dividends, too, can be calculated annually. This figure, called the dividend yield, can be measured by adding dividends received during the year and dividing it by the stock price. The yield must be higher than the annual inflation rate. Asset allocation is also critical. In this, one can look at an opportunity to diversify globally. This will make your portfolio more stable and less vulnerable to domestic volatility and inflation.

Investing Tax-Efficiently

Because investments have potentially higher returns than cash savings, it’s important to protect your returns from tax. Two common ways to do this are through Individual Savings Accounts
(ISAs) and pensions.

ISAs currently allow you to invest up to 20,000 a year (tax year 2020/21), which can provide a tax-efficient return through interest, capital gains and dividend income. Pensions offer the same benefits, plus tax relief on your contributions up to a maximum of 40,000 a year (or 100% of your salary if it is less than 40,000). However, you can’t currently access your pension money until you reach age 55.

Protect Your Portfolio From Inflation

Inflation is low, but that doesn’t mean investors should ignore it. To create a portfolio aligned with your goals and choosing the right inflation-beating investment vehicles, it’s important you have a good mix of investments in your portfolio. To discuss your options, please contact us today to find out more.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.

Past performance is not a reliable indicator of future performance.

Market Update 25/09/20

Stocks fell last week, marking the longest weekly slide since 2019, as investors continue to digest news that U.S./China trade tensions are rising, a coronavirus vaccine won’t be widely available until April of 2021, jobs data came out worse than expected, and expectations are fading that a new fiscal stimulus package will be passed.

Mega-cap stocks outperformed the S&P 500 last week, but Microsoft, Apple, Netflix, Amazon and Facebook are all still down for the month. Small-cap and cyclical stocks were hardest hit by the news that a vaccine is further away than initially thought. Ruth Bader Ginsburg’s death has ushered in fears that stimulus talks between Republicans and Democrats could be overshadowed by a political battle for a Supreme Court nominee. A surge in coronavirus cases in Europe has also seen investors shun some European stocks on fears that economic restrictions could be reestablished.

The US equity market has fallen by 2.2% over the week, whilst technology stocks have lost 1.1%. European markets fell by 4.5%, UK equities lost 3.8%, with the more domestically focused mid-cap stocks losing 5.4%. Japanese equities are down 0.7%, whilst Australian stocks were one of the few bright spots, rising 1.7%. Emerging markets in aggregate gave up 4.6%.

Haven government bonds have provided a little protection, although with yields so low their benefits to investors as a haven are reducing. 10-year US Treasuries are trading higher, currently yielding 0.66%, and similarly, German bunds are now trading at a yield of minus 0.52%. However, UK gilts sold off a little this week as the Bank of England poured water on rising expectations of negative interest rates anytime soon. 10-year Gilts are currently trading at 0.19%

Gold sold off 5.0%, with gold mining equities falling by over 7% over the week, not helped by the US dollar strengthening. Copper fell 3.9%, whilst Brent and US WTI (West Texas Intermediate) crude oil fell 3.0% and 2.3% respectively.

Several countries across Europe have tightened rules on social interaction in response to a rise in the number of coronavirus cases. However, to date, none have opted for a full national lockdown, although none have ruled it out either. The UK’s Chancellor, Rishi Sunak, announced plans to replace the employment furlough scheme, which finishes at the end of October, with a German-style subsidy plan, with the Treasury subsidising employees who worked at least one-third of their usual hours. Despite this, unemployment is expected to pick up sharply, with Goldman Sachs forecasting as many as 2.2 million people in the UK likely to be added to the officially unemployed in the coming months.

Economic data has been mixed with US house sales continuing to be a bright spot, whilst initial jobless claims have risen versus recent weeks. In Europe, whilst leading indicators as to manufacturing activity have remained robust, pointing to continued expansion, the service sector slipped back into contraction. The Market Eurozone Services PMI (purchasing managers index), a leading indicator as to new orders and hiring intentions, slipped to 47.6 this week, with 50 marking the dividing line between contraction and expansion.

A further slide in markets was averted on Thursday, on news that Nancy Pelosi, Democratic speaker of the House of Representatives in the US, was ready once more to try and renegotiate a new coronavirus relief plan.

The Coronavirus Budget – 2020 Summary

Chancellor Pumps Billions Into Economy To Combat Coronavirus

In this Government’s first budget and the first since the UK left the EU, the Chancellor, just four weeks into his role, was faced with a number of challenges.   

A lot of the material content of this Budget had been in respect of existing areas that had been foreseen. However the global economic effect that the current Coronavirus outbreak, combined with the devastating effect that flooding has had on certain areas of the UK has led to the need for all of these issues to also be incorporated, whilst ensuring this is a Budget that delivers on the promises made by the government to lay foundations for the UK’s future prosperity.

What will be greeted with a sigh of relief for the financial services industry is there has only been a minimal amount of tinkering. It is widely hoped that the current uncertain economic climate will only be temporary in nature and that the situation will be a little more settled by the time the Autumn Budget comes around.

Key Announcements Made by Mr. Sunak in his First Budget: 

Income Tax

  • The tax-free personal allowance will remain at £12,500 for 2020/2021.
  • The higher and additional rate tax thresholds remain unchanged as do the starting rate for savings income, dividend allowance and personal savings allowance.
  • The Scottish Government presented its Budget for 2020/2021 on 6th February and set the starter and basic rate thresholds at £2,085 and £12,658 respectively. All other thresholds remain unchanged.
  • Top Slicing Relief (TSR) on life insurance policy gains – Following a recent First‑Tier Tribunal case, the government will legislate in Finance Bill 2020 to put beyond doubt the calculation of TSR by specifying how income tax allowances and reliefs can be set against life insurance policy gains. This measure will apply to all relevant gains occurring on or after 11 March 2020.

Capital Gains Tax (CGT)

  • Effective from 11 March 2020, the lifetime limit on gains eligible for Entrepreneurs’ Relief (which offers a reduced 10% rate of Capital Gains Tax on qualifying disposals) will be reduced from £10 million to £1 million.
  • The annual exempt amount increases to £12,300 from 6 April 2020.
  • Trustees will benefit from an annual exempt amount of £6,150 although this amount will be diluted where the settlor has created more than one trust subject to a minimum of £1,230 per trust.

Inheritance Tax (IHT)

  • The only IHT related change is the already known raising of the residential nil rate band to £175,000.

Corporation Tax

  • The main corporation tax rate will remain at 19% rather than pressing ahead with the previously planned reduction to 17%.

Pensions

  • The lifetime allowance will increase to £1,073,100 from 6 April 2020.
  • Changes to the tapered annual allowance from 6 April 2020.
  • Following the proposals to compensate senior NHS clinicians who have been subject to the annual allowance charge, the two tapered annual allowance thresholds are being raised by £90,000. This means that those whose “threshold income” is £200,000 or less will not be affected by the taper at all, while those whose “adjusted income” is between £240,000 and £300,000 will have a reduced annual allowance of between £40,000 and £10,000.
  • For those with total income (including pension savings /accrual) over £300,000, the tapered annual allowance will reduce further, to a minimum of £4,000. For example, someone with total income of £312,000 or more will have a tapered annual allowance of £4,000.
  • In view of the revision in the tapered annual allowance thresholds, the proposals to offer greater pay in lieu of pensions for senior clinicians in the NHS pension scheme are not being adopted.
  • The government will shortly be publishing a call for evidence regarding the disparity in the tax relief position for low earners making pension contributions dependent on the method of tax relief adopted by the pension arrangement.
  • Following the Civil Partnerships (Opposite-sex Couples) Regulations 2019, individuals can derive or inherit a State Pension from an opposite-sex civil partner.

ISAs

  • The ISA annual subscription limit will be £20,000, while the Lifetime ISA annual limit will remain £4,000, for the 2020/21 tax year.
  • However JISA and Child Trust Fund subscription limits will be significantly increased from £4,368 to £9,000 for 2020/2021.

National Insurance

  • The National Insurance contributions (NICs) Primary Threshold and Lower Profits Limit, for employees and the self-employed respectively, will increase to £9,500 from April 2020.

Stamp Duty

  • Non-UK resident Stamp Duty Land Tax (SDLT) surcharge – The government will introduce a 2% SDLT surcharge on non-UK residents purchasing residential property in England and Northern Ireland from 1 April 2021.

Coronavirus support

  • To support the NHS and other public services, there will be a £5bn emergency response fund.
  • A £500 million hardship will help vulnerable people.
  • Support with sick pay will be available with statutory sick pay paid to all those who choose to self-isolate, and Contributory Employment Support Allowance benefit claimants will be able to claim sick pay from day one.
  • Sick pay payments will be refunded for two weeks for firms with fewer than 250 staff.
  • Business interruption loans of up to £1.2m will be available for small firms.
  • Business rates will be abolished for firms with a rateable value below £51,000 in the retail, leisure and hospitality sectors.
  • The Science Institute in Weybridge, Surrey which is analysing coronavirus samples will get a £1.4 billion funding boost.

Consultations and Other Forthcoming Legislation

The Government:

  • is legislating to clarify when fund management services are exempt from VAT and will set up an industry working group to review how financial services are treated for VAT purposes.
  • will publish an evaluation of the introduction of Making Tax Digital for VAT, along with related research.
  • will have a call for evidence on raising standards for tax advice available to individuals.
  • together with the UK Statistics Authority (UKSA), is launching a consultation on the shortcomings of the Retail Prices Index (RPI) measure of inflation. This closes on 22 April 2020.
  • will consult to ensure that where tax legislation makes reference to the London Inter-Bank Offered Rate (LIBOR), which is being replaced in 2021, it continues to operate effectively.
  • will legislate to take further action against those who promote and market tax avoidance schemes.

Miscellaneous

  • No fuel or alcohol duty rises.
  • Pubs will benefit with business rate discounts rising this year from £1,000 to £5,000.
  • A plastic packaging tax will come into force from April 2022.
  • Emergency relief funding of £120 million will be provided for communities affected by the recent flooding and additional £200 million will be available for flood resilience. In addition to this, over the next 5 years, the total investment in flood defences will be doubled to £5.2 billion.
  • A new ‘nature for climate fund’ will be set up with £640 million of funding to protect natural habitats. This will also fund 30,000 hectares of new trees.
  • By the middle of 2025, more than £600 billion is set to be spent on roads, railways, broadband and housing.
  • Over 5 years, £2.5 billion will be made available to fix potholes and resurface roads.
  • An extra 6,000 places for rough sleepers will be provided under a £650 million package to tackle homelessness. This will be funded by the stamp duty surcharge mentioned earlier in this summary.
  • After the Grenfell Tower fire, a £1 billion fund has been set aside to remove all unsafe combustible cladding from all public and private housing higher than 18 metres.

Keep your financial plans on track after the Budget 2020 with Lawsons Equity. To discuss the announcements made by the Chancellor of the Exchequer and their implications on you, your family and your business, please do not hesitate to contact us.

We look forward to hearing from you

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