Is equity release a conventional way to fund retirement?

Is equity release a conventional way to fund retirement?

Just a few years ago the answer to this question would probably have been no, but with equity release products now some of the most highly regulated in the UK and with the country’s ageing population looking for ways to raise money in later life it is not surprising that the industry is growing in terms of the number of products.

The Autumn 2018 Market Report from the Equity Release Council (ERC), highlighted that the equity release sector has doubled in size since the first half of 2016 and that property is now recognised by some as being vital for their retirement. As the value of property has increased in parts of the country, so retirement ages have also risen creating a need to release cash from the property in order to fund anything from home improvements, debts, supplement retirement income, or to support children and grandchildren as they buy homes of their own.

How can I release money from my home?

As long as you are over 55 and own your home, there are two ways you can release money without having to sell your property or make monthly repayments. The first is a lifetime mortgage which allows you to borrow money against the value of your home, which is repayable with interest when you die or move into long term care. The second is known as a home reversion plan and it gives you access to some or all of the value of your home, allowing you to live in the property rent-free for the rest of your life.

If you are at this stage in life and find yourself property-rich but cash-poor, it may make sense to explore these options. It is a big decision to make and not one you should make alone. Talking to one of our professional financial advisers will give you the assurance that you are receiving all relevant information and industry safeguards. Your adviser will thoroughly review your financial circumstances and be able to advise whether equity release is suitable for you. If it is, they will discuss the most appropriate way of releasing your equity and address any concerns you may have such as Inheritance Tax implications. 

Important Information: Equity release may involve a lifetime mortgage or a home reversion plan. To understand the features and risks, ask for a personalised illustration. Equity release may not be right for everyone. It may affect your entitlement to state benefits and will reduce the value of your estate. Check that this mortgage will meet your needs if you want to move or sell your home or want your family to inherit it. If you are in any doubt, seek specialist advice.

Lighthouse is a member of the ERC and has a team of specially qualified Equity Release advisers.

Find out more here Equity-Release or call 0800 085 8590 to book a complimentary initial consultation.

Auto Enrolment increase in contributions

Don’t automatically stop saving

Since 2012 an additional 10 million people in the UK have started saving into a pension via their automatic enrolment workplace pension scheme. This is thanks to the Government initiative to make it compulsory for employers to contribute into a pension plan for all their employees earning above the threshold figure of £6,032. The minimum contributions of employers and employees will rise on 6 April 2019. Both sound like good news and they are but they shouldn’t stop you thinking about your retirement and working out if you need to save more.

The facts

The minimum contribution to a workplace pension has gone up from 5% to 8% of your salary. You may be lucky and find that your employer has decided to pay the whole 8%. Legally, however, they only need pay 3%, leaving you to pay the outstanding 5%. This is calculated by combining the total of your regular wages, commission, overtime, sick pay and maternity/paternity pay. It is taken from your pay before it is taxed so you effectively get full tax relief on the sum.

You are automatically enrolled if you are at least 22 and under the State Pension age and are working in the UK under a full-time, part-time, permanent or temporary employment contract. If, however, you are self-employed you will not have access to automatic enrolment into a pension scheme and while the Government is considering plans to help this group save for retirement, there is nothing formal in place yet. If you are self-employed it is important to take full control of your financial planning.

But will it be enough?

Even if you have a workplace or an independently sourced pension don’t assume it will be sufficient to see you through retirement. We have a longer life expectancy and the State Pension age has increased with no guarantee that it won’t again. And you shouldn’t presume that your state pension will be sufficient to live on.

The age at which you start to contribute to a plan makes a difference, if you start your saving early in your working life the number of years plus the accumulated interest will provide you with a healthier sum than if you are only auto enrolled towards the end of your career.

It literally does pay to take an active interest in how your pension is performing and by seeking professional financial advice.

CEO Malcolm Streatfield discusses a positive year for Lighthouse Group

CEO Malcolm Streatfield talks to DirectorsTalk about its final results for the year ended Dec 2018. Malcolm talks us through the year highlights, how LFA is progressing and plans for growth, Tavistock progression, the rationale behind the auto-enrollment business disposal and 2019 progress.

A Positive Year for Lighthouse Group from DirectorsTalk on Vimeo.

Lighthouse Group has been listed on AIM since 2000 as an integrated financial services company for investors, coupled with significant scale in terms of distribution through financial advisers and wealth managers and its fully diversified business model.

As one of the UK’s largest autonomous financial advice and wealth management groups, Lighthouse provides a comprehensive range of services to businesses and individuals and is retained by most of the major trades unions and other affinity groups to advise their combined memberships of over 6 million members.

The Group aims to increase its relationships with, and the benefits it derives from, its affinity group and professional partners.

In addition to a wide range of financial advice, the Group has developed innovative products to meet th specific needs of its retail and corporate customers.

Lighthouse operates from its headquarters in London as well as having principal operating offices in Stockport and Woodingdean, near Brighton.

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.