How are you? Really?

How thinking a little differently could make a real difference to the income you get from pension savings you have outside a public sector or other defined benefits scheme.

“How are you?” “Good” or “Fine” you’re likely to reply. That’s because we all know that “How are you?” is an alternative greeting to “Hi”. We know that it’s usually said with nothing more than a passing interest in your well-being or health. And that’s OK. Imagine if you were to launch into a long tale about being tired, wheezy with asthma, trying to lose weight, taking cholesterol medication and a history of heart disease. It’s just not in our psyche or our reserved British nature.

However, sometimes there’s a real benefit to talking about your health. You just might not realise the importance. It could make a big difference if you’re approaching retirement and considering converting your defined contribution pension pot (pension savings outside public sector schemes where benefits you receive are not linked to your salary) into an annuity for a guaranteed income for life, or drawing down income.

So what are we suggesting?

First, think about ‘personalising’ or ‘tailoring’ your income. Forget about whether you ‘qualify’ for increased annuity rates due to your health.

Guaranteed income for life

What does this really mean? Generally, when you look at buying a guaranteed income for life (an annuity) you would be asked about your health to see if you are ill enough for an ‘enhanced’ or ‘impaired’ annuity. If you qualified, it would mean your income would be higher.

But, like everything these days, underwriting moves on as life expectancy predictions change and medical science continues to improve. The scope of personalisation “underwriting” is now so broad that it’s becoming almost impossible to second guess if someone might ‘qualify’ or not.

It isn’t just about whether you have a serious condition such as heart problems or cancer. It can also cover more everyday things such as raised blood pressure, where you live, smoking, alcohol intake and diabetes to name but a few. The idea of qualification is becoming redundant. Everyone can now get their own ‘personalised’ rate.

If we think about it at its simplest, everyone has a height and weight. Everyone is likely to have a postcode. Therefore, everyone can obtain their own personalised underwritten annuity rate. You don’t need to be seriously ill to get a higher guaranteed income for life.

This means that if you’re thinking of buying an annuity you shouldn’t be settling for anything ‘standard’, off-the-shelf or ordinary. Instead, think about having your plan tailored to your exact specifications. It should be bespoke. It could make quite a difference to the amount of income you receive.

Underwriting for drawdown reviews

People have more choice in how they use their money in defined contribution pension schemes, with drawdown becoming the popular choice. Understandably, flexibility is often high on their wish list. The tricky part though is knowing whether you’re taking too much out of your pot when you need income.

Obtaining a personalised annuity quote will provide an example of the level of guaranteed income for life you could receive. This can then be used as a benchmark for the income you’d like to take out of your drawdown plan. It will help you determine if your investments are providing the returns you need, and if the income you are taking is sustainable.

Asking your financial adviser to arrange for you to be underwritten at each drawdown review or annuity purchase will ensure that you’re getting the most out of your retirement, and have a truly tailored retirement income solution.

Act now so as not to leave an inheritance tax bill

Helping relatives

If you are likely to help relatives with their finances as they get older and less able to cope, you should arrange to have a Lasting Power of Attorney. This will allow you to take decisions and act on their behalf. It is more straightforward if you have the authorisation of the person on whose behalf you will be acting, so it makes sense to arrange a Power of Attorney before it is actually needed.

You can’t take it with you!

If you are in the lucky position of having more money than you need for the rest of your life, start giving it away to whoever you would like to benefit from it. By doing this in a carefully planned way, with the help of a professional financial adviser, you may be able to eliminate any inheritance tax payable when you eventually pass away. 

Keep your money and reduce inheritance tax!

Putting some of your savings into investments that qualify for Business Property Relief, such as shares listed on the Alternative Investment Market (AIM), can help reduce inheritance tax as, once you have held them for two years, they are exempt from the tax. AIM shares can be held in ISAs, with the result that you can reduce the value of your estate and continue to benefit from income and growth tax-free without giving them away. 

You could consider using a specialist discretionary fund manager or invest via one of the specialist funds that are now available. However, investments in unquoted companies and those quoted on AIM are considered to be high risk and it may be difficult to sell them quickly. It is important that you understand the risks that you are taking when making such investments and you should take professional financial advice before acting.

The value of your investments can go down as well as up, so you could get back less than you invested. A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation. Tax advice which contains no investment element is not regulated by the Financial Conduct Authority. The Financial Conduct Authority does not regulate Will writing.

How to save for a future free from money worries

To be able to enjoy a comfortable retirement later you need to start saving now. Here are some tips for a future free from money worries.

Money to spare? Top up your pension

Making contributions to your pension fund is the most tax-efficient way of saving, as contributions benefit from income tax relief at your highest rate.

Rather than guess, you should work out what you have already accumulated, how much income this might give you when you retire and how much income you are likely to need to be financially independent. Then you will be able to work out whether you need to save more. It is best to ask a financial adviser to help you work out these figures, as calculating them is complex and you need to make sure they are as accurate as possible.

If you do need to save more, in most cases you should consider making additional contributions into your employers’ scheme or a personal pension. You pay contributions out of taxed income, but the government tops up your contributions by the amount of tax you paid on them. For instance, if you are a basic rate taxpayer, for every £80 you pay in the government pays in an additional £20.

Check your pension at least once a year. If you have personal pensions or are a member of schemes that are based on defined contributions (ie which are not based on defined benefits such as final or career average salary), perhaps from previous jobs, you should make sure that the funds are invested in a way that matches your objectives (see making your money work hard section). To do this you should consult a professional financial adviser.

Still got money to spare? 

If you still have even a few pounds spare each month, consider increasing your mortgage repayments, assuming that your mortgage provider allows you to do this. Over payments go towards paying off the amount you have borrowed, gradually reducing the amount you owe. 

Lazy savings?

Do you have money, over and above “rainy day” money equivalent to roughly three months’ expenditure, sitting in cash saving accounts? If so and you are saving for the medium-to-longer term, consider moving the money to stock market-based investment funds. This will give them the potential to work harder for you.

Cash you have in savings accounts is earning very little in interest and will therefore have been decreasing in value in real terms since 2008. To buy something now that cost £100 in 2008 you would need £130.90 (Source http://www.in2013dollars.com/2008-GBP-in-2018). So unless your savings have grown by 30.90% in the last ten years you are worse off now than you were ten years ago.

In contrast, during the 10 years ended November of 2018, the FTSE 100 returned 63% (Source https://www.forecast-chart.com/historical-ftse-100.html). Stock market investments are inherently risky – the value of stocks, shares and funds can go down as well as up – but there are ways of reducing risk. One is by not buying individual stocks, shares, bonds or other types of investments directly. Most people put their money into one or more investment funds that then invest the pool of investors’ money across a broad range of types of investments. This ensures that you do not have all your eggs in one basket.

Past performance is no guarantee of future returns.

Another is by choosing investment funds that are managed in a way that suits your attitude to risk. Some people are more willing or can afford to take more risk than others. Your financial adviser will help you work out your risk profile and can then recommend investment funds that match it. Your risk profile may change with your age and circumstances. 

Don’t miss out

Do you have premium bonds? If so, does National Savings and Investments have your correct address? If they do, they will notify you if one of your numbers comes up. If they don’t, contact them and find out whether you are among the 1.5 million or so unclaimed prize-winners (Source: NS&I, August 2018 https://www.nsandi-adviser.com/august-2018-premium-bonds-prizes)

The value of your investments can go down as well as up, so you could get back less than you invested. A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation. Tax advice which contains no investment element is not regulated by the Financial Conduct Authority. 

Family matters

An addition to the family?

When you are having a baby, financial protection is probably the last thing on your mind. But you should check whether you need to increase your and your partner’s life insurance and critical illness cover.

Educate the children

Teaching your children about budgeting, saving and managing money from an early age will help them make good financial choices when they start earning money themselves.

Make saving a family affair – 1

Encourage the whole family – parents and children, grandparents and grandchildren, brothers and sisters, nieces and nephews – to open ISAs and pay in as much as possible. Any growth and income they take is tax-free.

Make saving a family affair – 2

If you have money to spare, consider paying in to your children’s or grandchildren’s pensions, as money in the fund can grow tax-free. There are restrictions on the total that can be paid in each year and you need to make sure you are paying into a suitable pension fund. You should therefore take professional financial advice, in conjunction with your relative if they are over 18, before doing anything.

A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation. Tax advice which contains no investment element is not regulated by the Financial Conduct Authority.

And make sure you stay in control

Staying in control of your finances should be relatively straight-forward if you follow a few simple steps.

Check your monthly statements

Check your bank and credit card statements each month for payments you no longer need. If you spot any cancel them. You may also spot the occasional error or fraudulent payment, which, if you act immediately, your bank or credit card company should be able to refund.

Claim unclaimed benefits

Do you have a young family? If so have you registered for Child Benefit? When doing so make sure you also claim the state pension credits that mothers can receive if they don’t work.

Talk about money

Who runs the family finances in your household? If it’s you, do you talk about money with your partner? Doing so can help reduce over-spending, not to mention arguments about money. If your partner is in charge of the family finances, why not ask them to explain things to you, not least in case the unexpected happens?

Embrace austerity – and help save the planet

Make a shopping list and stick to it, to reduce impulse purchases. Where possible buy unpackaged produce from market stalls and local, independent shops. As well as reducing your food bills and eating more healthily, you will be helping, albeit in a small way, save the planet.

Use technology to stick to your budget

Use the app provided by your bank combined with other personal finance apps, depending on what you want to achieve. For instance, get an alert when you are about to go overdrawn; set a maximum amount to spend each week or month and get an alert you when you are about to reach your limit; schedule in key dates such as when your insurance is up for renewal, or the repayment date for credit cards.

Keep track of what you’ve got

Document, on a spreadsheet or a sheet of paper – whichever suits you best, your (and if appropriate your partner’s) monthly income and expenditure. Check them every month, to make sure you are on track. On a separate sheet put the details and values of your pensions, savings accounts, insurance policies and levels of cover, together with regular payments in or out. Review these at least once a year. As well as helping keep your finances on an even keel, this will help you spot and duplications or gaps in your finances.

Make thing easier for yourself

Are you one of the 11.5 million or so people who must complete a Self-Assessment tax return (Source: HMRC, January 2019 https://www.gov.uk/government/news/self-assessment-deadline-less-than-one-month-to-go)? To avoid a last-minute scramble next year, put all documents you need into a folder as soon as you receive them. If you receive some online and others by post, use two folders, one digital and the other physical. Create a check list and tick off each document as it arrives. That way, you will have all the information you (or your accountant) need(s) when you come to fill out your next tax return.

Eliminate duplication

Do you know exactly what benefits you get from your employer? Check the detail. You may find that it includes life insurance and other types of insurance that you may already have taken out personally. You may be able to save money by eliminating duplicates – benefits provided by your employer are likely to be more cost-effective to those you take out privately. 

Everything in order?

Do you have a Will? If not, make one this month – not matter how young you are – with the help of a professional Will writer, to make sure that it is valid and really does reflect your wishes. You may be in the best of health, but what if that proverbial bus comes along when you aren’t looking? And while you are about it, make a list of all your financial accounts and assets and place them in a safe deposit box with a solicitor or bank. If you already have a Will, review it. It is surprising how quickly it can get out of date.

Tax advice which contains no investment element is not regulated by the Financial Conduct Authority. The Financial Conduct Authority does not regulate Will writing.

Take control of your finances

Getting to grips with your finances doesn’t have to be daunting, Here are our suggestions for getting started.

It may seem obvious but spend less than you earn. Work out your monthly income: this includes your salary or wages, any maintenance or other regular payments, interest from savings and income from investments. Only include regular income that you know you will receive.

Track how much you spend

Write down how much you and your household spend and on what. Include everything, from your mortgage and insurance to a sandwich at lunchtime and a drink after work. Check it weekly – it will be less daunting than doing it monthly. You will soon start noticing fluctuations in the amounts you spend on regular purchases – work out why they have increased or decreased. 

Limit regular payments

Some regular payments are essential, for instance council tax and utility bills. However, the more that goes out of your account each month automatically, the less you have to spend on items of your choice. Do you really need those subscriptions, even if they only cost a few pounds a month each?

Work out what is important to you

Deciding what you really want will help you spend less on things that could prevent you achieving that. So, for instance, if you want to have enough for the deposit on your first home or you would really like to take a year off when you hit fifty, you may find that eating out so often becomes less important to you. 

Make your progress visible

Think of the amount you are going to save as an expense. Don’t wait to see how much you have left over at the end of the month. Set up a regular payment to transfer a fixed amount each month to a savings account. As well as making sure that you do actually save, this also makes it easier to check on your progress.

Allow yourself some fun

Your monthly expenditure should include some “fun” money, for you to spend on whatever takes your fancy. That way you won’t be tempted to dip in to or “borrow from” your savings.

Time to spring-clean your finances!

Now, with the end of the tax year fast approaching (it ends on 5 April in case you are wondering), is a good time to spring-clean your finances. Here are some ideas that could help you make the most of your money, now and in the future. Striking a balance between spending and saving is not as difficult as it seems and you won’t necessarily have to sacrifice things you enjoy now.

Here are a few tips to help you optimise your finances in the 2018/19 tax year – and possibly for many years ahead. To be effective for the current tax year you need to act before 6 April.

Use or lose annual allowances

Using the annual allowances that the government gives you each year can help you shelter as much money as possible from tax in the future.

  • Check how much income your workplace and any other pensions are likely to provide. Will this be enough to cover your expenditure in retirement? If not, consider paying in more, especially as the 20% income tax you paid is added to your contributions and any growth is free of tax.
  • Have you and your family made the most of your £20,000 ISA allowances for the 2018/19 tax year? ISAs are an efficient way of saving because there is no tax to pay when you withdraw money and, unlike pensions, you can access them whenever you want.
  • Would you like to help your children or grandchildren financially? If so, you could consider paying in to an ISA on their behalf. You could also pay into your spouse’s or children’s pensions.

Optimising income tax

This is particularly important for people with income of £50,000 – £60,000 and who could lose child benefit.

  • Are you on the right tax code? Even a small change in your circumstances can affect it.
  • Have you included charitable donations on your tax return and, if you pay higher rate tax, reclaimed it on gift aid donations?
  • Could you contribute more to your pension without going over your annual contribution and lifetime allowance limits? 
  • Might it make sense to transfer some income-producing assets to your spouse or partner or vice versa, if one of you does not use your full personal allowance or pays a higher rate of tax?

There are pros and cons to these suggestions and it is important to understand the full implications of what you are considering. It therefore makes sense to talk to one of our professional financial advisers before you act.

The value of your investments, and the income you receive from them, can go down as well as up, so you could get back less than you put in. A pension is a long-term investment and inflation will reduce how much your income is worth over the years. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation. Tax advice which contains no investment element is not regulated by the Financial Conduct Authority. 

How we got Mr Jones’s additional pension back on track

It is easy just to leave your savings where they are. However, it pays to review them with the help of a professional financial adviser, as Mr. Jones discovered when he contacted us earlier this year. Mr .Jones, aged 50, is divorced with non-dependent children and is planning to retire at age 65. A few months ago he asked us to look at his pensions, which he had neglected for years.  He had a personal pension to which he was contributing £64 a month net (£80 per month gross). This pension was started many years ago and was invested in a with-profits fund. When he consulted us it had a value of £75,600. He also had a small public sector pension which he can take when he turns 65 and will qualify for the maximum basic state pension when he reaches the age of 67.

Needed to boost his pension pot

Mr Jones was particularly concerned about boosting his personal pension provision, while bearing in mind that he may downsize when he retires so is likely to have additional capital available then from selling his property. He wanted to pay a little more towards his pension, although he didn’t have a set target for the amount of income he would need when he retired. He was likely to receive an inheritance from his elderly parents in due course.

Personal pension not aligned to risk profile

Our adviser completed a risk analysis for Mr. Jones, which highlighted that the fund in which his personal pension was invested was unlikely to be delivering an appropriate performance for Mr. Jones’s needs and expectations. In addition, the cost of this old plan was not particularly competitive compared to that of more modern plans, which might also offer Mr. Jones more flexibility and choice in terms of accessing his funds when he retires.

Move to a modern, more competitive plan

The adviser suggested that Mr. Jones move his personal pension to a more competitive plan, which would also allow him to take advantage of the flexible access options when he starts drawing his pension. The adviser also recommended investing the pension fund in a blend of investment styles, with a competitive overall average charge. Any income generated at this stage will be rolled up for growth potential. This ensures competitive overall annual charges and gives a risk-targeted investment approach to Mr. Jones’s retirement fund.

Pension now aligned with his profile and goals

Mr. Jones agreed to go ahead with the adviser’s recommendations and increased his monthly pension contributions to £200 per month net (£250 gross), as he now has the budget available to do this. He now has a modern, cost-effective personal pension that is aligned with his objectives and personal profile and designed to grow in line with his expectations. The adviser will review Mr. Jones’s pension and other savings annually, to ensure that they remain “risk appropriate” and that Mr. Jones is contributing as much as he can afford within the various limits. Mr Jones’s name and circumstances have been changed to preserve anonymity.

The value of your investments, and the income you receive from them, can go down as well as up, so you could get back less than you put in. A pension is a long-term investment and inflation will reduce how much your income is worth over the years. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.

How we helped Mrs F. get £5,500 a year more income

Mrs F. retired early and wasn’t sure when or how she should take her final salary pension. She asked us to take a close look and explain her options. Here is how we managed to get her £5,500 a year more, with no additional risk.

Mrs F., aged 61, retired from her role in IT in January this year. However, she did not claim her final salary pension because the scheme’s normal retirement age is 65. Since January she had been living on a small personal pension plan (around £6,000 per year) and drawing down from her savings in the bank (£135,000).

Mrs F. is divorced and has two grown-up daughters in their late 20s, neither of whom is financially dependent. She has absolutely no plans to marry again. She decided to contact us to see whether we could help her decide what to do about her final salary pension. After a quick chat on the phone with Mrs F., one of our advisers went to see her and completed a risk profile, which identified her as a very low risk-taker.

Spouse’s pension on death not required

He discussed the possibility of claiming her pension now rather than waiting until she reached the age of 65. However, on reviewing the scheme he found that, like many schemes, it included a 50% spouse’s pension on death. He asked the pension scheme in question if it was possible to forgo the spouse’s pension so that she could receive a higher pension – unfortunately this was not possible.

They offered her an annual pension of £12,400 with a 50% spouse pension, or £8,700 per annum with a pension commencement lump sum of £58,419. The adviser explained that she could look at transferring her scheme to obtain a single life pension and suggested that she should also ask what the cash equivalent transfer value was, which turned out to be £361,560.

Mrs F. is a smoker and drinks an average amount of alcohol but does not have any medical conditions or take any medication. She said that she did not want any guarantee built into her pension because “my children will get the house and all my savings when I die”, and her original scheme would have most likely also ended upon her death.

Getting the best rate from a suitable provider

The initial quotes the adviser obtained looked favourable. However, knowing that providers don’t always give their best quote immediately, he narrowed the research down to two suitable providers and, playing off one off against the other, was able to get the rate up by a further £300 a year.

Potentially well over £100,000 better off

The final quotation was for an income of £17,900 a year, which equates to £5,500 a year more than Mrs. F.’s original scheme was offering, and if Mrs F. lives to age 86 she will have received well over £100,000 more income as a result of taking professional financial advice.

Mrs F. was absolutely delighted with this outcome and could not speak highly enough of our service. She was relieved because she very nearly took the decision to claim her pension back in January and almost put the forms in the post and is so pleased she took a moment to think about it.

Until recently, transferring out of a defined benefits pension scheme was generally not appropriate because of the loss of guarantees. However, now that more options are available, it might be beneficial to transfer your benefits, but you should not do this without fully understanding all the implications. It is therefore essential to take professional advice from a suitably qualified expert. We have changed Mrs F.’s name and circumstances to preserve her anonymity.

How Margaret helped her grandchildren through university

An exciting time for children but not so much for their parents if they have not budgeted to help fund this expense.

How much can university cost?

In a word – going to university is expensive. On top of major items such as tuition fees and accommodation, there is the cost of living – rent, bills, food, books, broadband, mobile phones, travel and let’s not forget the beer! The list is endless and unless you started saving early how are you and your children going to foot the bill?

According to “The Guardian*”, it can cost around £85,000 per child per degree, depending on where the university is.

Using a growth rate of 3% net, you need to save £608 per month over 10 years to get £85,000. Or if you have a lump sum, £60,000 invested for 10 years should give you £85,000. This is a huge expense and if you have more than one child the amount multiplies. 

A lot of people leave it too late to start saving, with the result that their children or grandchildren may be saddled with debt for a long time to come.

Meet Margaret, the grandmother

Margaret (not her real name) is an 80 year-old widow and much-loved granny who has decided to help her children fund the university fees for her grandchildren. She is comfortably off but is surprised when her financial adviser tells her that her total wealth is over the inheritance tax threshold and if she does not take action, her family will have to pay 40% inheritance tax on the amount above the threshold.

Margaret tells her adviser that she is very keen to help her sons and daughters with the cost of university for their children and wants to know if she can combine this with IHT planning. 

Control over who gets the money

She is not keen for her children or grandchildren to have direct access, she wants to be in control of her funds. One of her children is going through a tricky patch in their marriage and she certainly does not want any of her hard-earned cash ending up as part of a divorce settlement. Then there is her son’s gambling habit to consider, he cannot be trusted with a large lump sum.

Her adviser tells her that using a trust is a sensible way of keeping control of the money and that two types of trust are commonly used for university planning: gift trusts and loan trusts. As Margaret is more than happy to give up access to her capital as the income from her NHS pension is ample for her needs she opts for a gift trust.

Her adviser recommends using a discretionary trust, as it’s up to the trustees to decide who, among the beneficiaries, will benefit and when they will benefit from the trust fund.

He tells her that she will be the first named trustee and she should choose the other trustees wisely as ultimately they will be managing the trust fund. He advises her to give the trustees a letter of wishes, so that when she dies they will know how she wants the fund to be divided. He also reminds her that a beneficiary cannot demand money from the trustees and that while their share is in the trust it does not form part of their estate for divorce, bankruptcy or inheritance tax. On her adviser’s recommendation, Margaret, opts to put the trust fund into a single premium life assurance bond. This can be an onshore or offshore investment bond. 

Beneficiaries likely to be non-tax payers

As Margaret is setting this money aside for a long time to benefit her grandchildren who will most likely be non-taxpayers when they benefit from it, she opts for an offshore capital redemption bond. This will ensure that the investment lasts until all the grandchildren who want to go to university benefit from it. Her adviser also suggests that she choose to have the maximum number of segments within the bond, which can then, in due course, be assigned to the various beneficiaries. 

The trustees can assign segments once beneficiaries reach age 18. There is no tax to pay when segments are assigned to beneficiaries. If the beneficiary later cashes in those segments, they, not Margaret, will pay the tax on any gain.

Her adviser tells her that if Jenny, the oldest granddaughter, decides to go to university at age 18 the trustees can assign some segments to her. If Jenny is a poor student and has no income, under current rules she will be able to use her personal allowance, the £5,000 savings rate, the £1,000 personal savings allowance and any 5% tax deferred allowance, so it is very unlikely that she will have any tax to pay.

Margaret feels that with this solution, she is killing two birds with one stone. After seven years the gift will be outside her estate for IHT purposes and she is putting the money aside for a very worthy cause indeed: her grandchildrens’ future.

The value of your investments, and the income you receive from them, can go down as well as up, so you could get back less than you put in. Tax advice which contains no investment element is not regulated by the Financial Conduct Authority.

Find out more

If you would like to find out how you may be able to reduce IHT get in touch now. 

Call 08000 85 85 90 or email appointments@lighthousefa.co.uk.