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.

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.

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.

Why Lighthouse Group and Tavistock Investments formed a strategic alliance

Lighthouse Group (LON:LGT) and Tavistock Investments (LON:TAVI) announced today a strategic relationship with Lighthouse taking a 5.3% holding in the company. CEO’s Malcolm Streatfield and Brian Raven join DirectorsTalk to discuss the news.

Brian explains what it is that Tavistock do, how it will be using the proceeds and the rationale behind the partnership, while Malcolm tells us how Tavistock is going to further develop the Luceo Asset Management range of investment solutions, what it means for advisers and customers and also what we can expect to see from the relationship over the coming 12 months.

Lighthouse Group and Tavistock strategic alliance from DirectorsTalk on Vimeo.

Lighthouse Group Plc 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 the 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.

Lighthouse Group plc: A very healthy 26% increase to EBITDA

Lighthouse Group’s CEO Malcolm Streatfield talks to DirectorsTalk about the interim results for the six months ended 30 June 2018. Malcolm discusses the highlights for the first half of the year, how LFA and affinity partners are progressing and the strategy for LFA. Malcolm also explains about how the second half of the year has started and the expectations for the year.

Lighthouse Group plc 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 relationships with affinity groups and professional partners.
In addition to a wide range of financial advice, the Group has developed innovative products to meet the specific needs of its retail and corporate customers in the asset management and workplace solutions sectors.

Malcolm Streatfield discusses the Lighthouse results for the first half of 2018

Lighthouse Group’s main focus is on providing financial advice to ‘Middle Britain’ and is differentiated by contracts with 21 affinity partners. In this interview CEO Malcolm Streatfield discusses the results for the first half of 2018, highlighting good overall progress with revenues up by 5% from H117, PBT 12% and earnings per share 13%. The interim dividend was increased by 67%. Malcolm also outlines the group’s dividend policy, progress in the affinity business, an increasing level of recurring income and a positive start to H218.