Monthly Archives

October 2018

Simple Pension Tips For Self-Employed People

By | Business Planning

As Financial Planners servicing Kent & the South East, we have witnessed first-hand the steady rise in self-employed people looking for financial advice and tax planning. In fact, across the UK, the total number of self-employed has risen from 3 million to 5 million people since 2001. This is an exciting trend but it poses a lot of challenges when viewed through the lens of pensions.

Whilst employed people in the UK are now compelled to contribute towards a pension via Auto-Enrolment, no such obligation currently exists for self-employed people. The worrying result is that many of these people are failing to adequately prepare for their retirement, instead relying on the insufficient provisions of the State Pension.

Self-employed people face unique challenges when it comes to saving for a pension, as well as some great opportunities. On the one hand, irregular income can make saving for a pension quite difficult, and you have no employer contributions topping up your own contributions.

On the other hand, the fact that you are building a business gives access to a set of assets that could set you up for the future. Indeed, it is not out of the question that these assets, when handled correctly through careful financial planning, could pave the way for a comfortable early retirement.

Know the limits of the State Pension

Many of the self-employed people we speak to in and around Kent & the South East, have unrealistic expectations when it comes to the State Pension. Many people assume the Government will look after them in retirement but unfortunately the amount provided through the State Pension is simply not going to stretch far enough for many.  Indeed, with rising life expectancies and a growing elderly population, means that the State Pension system is likely to come under more strain in the years ahead

This makes it even more crucial for self-employed people to work with a Financial Planner to ensure they are saving adequately for their retirement. Presently in 2018-2019, the new State Pension will give you up to £164.34 per week. Even if you assume you will have paid off your mortgage by the time you retire and other expenses reduce, this is still far too low for most people to live on each month. Current figures estimate that about 45% of self-employed people, aged between 35 and 55, do not have a private pension to supplement their State Pension.

Know your tax reliefs

Self-employed people are at a disadvantage when it comes to pensions, in the sense that they have no employer to top up their contributions. However, they can still benefit from an important tax relief when making contributions. So, for every £100 you put into a pension the Government will effectively top it up by £25. This assumes you are a Basic Rate taxpayer. If you are in the Higher Rate bracket in England, Wales or North Ireland, then you can claim back an additional £25 for every £100 you put in.

Know about the different pension types

As a self-employed person, you do not benefit from a Workplace Pension Scheme but you do have a range of options when it comes to Personal pensions. By arranging your own Personal pension, you will have greater control over the choice of provider and where your funds are invested. It is important to be aware that there are different types of Personal pensions, such as Stakeholder Pensions and Self-Invested Personal Pensions (SIPPs). The former tend to have lower charges with limited investment choice, whilst for the latter have a wider range of investment funds to choose which costs more.

It is sensible to explore your options in detail before commencing contributions, especially if you are unsure which type of pension arrangement is most suitable for your needs. Our Financial Planners will be able to provide you with impartial advice and help you plan for a comfortable retirement.

Be aware of the limits

When you are self-employed you have the advantage of being able to decide your own contribution levels. However, just like everyone else, there is a limit to how much you can contribute and also receive in terms of tax relief. There are two limits in particular that you need to be aware of. Firstly, the ‘Annual allowance’ which limits the amount you can contribute to your pension arrangement in any one year. For the tax year 2018-2019, the maximum you can contribute to a pension and receive tax relief is £40,000. Any contributions above this amount cannot receive tax relief.

Secondly, the ‘Lifetime Allowance’ is the total amount you are allowed to save in pensions whilst receiving tax relief. In the 2018-2019 tax year, you can have up to £1,030,000 in your pension savings; any amount above this will not be able to receive tax relief. If you are fortunate enough to have more than this in pension savings, it is important to be aware of the implications. For instance, any amount over the Lifetime Allowance (LA) that you withdraw as a lump sum will be taxed at 55%. If you decide to draw funds over your LA as a regular income, this will be taxed at 25%.

If you think your pension savings might one day exceed the then current Lifetime Allowance, we would encourage you to speak to one of Financial Planners to talk through your options. With clever planning, it may be possible to avoid paying unnecessary tax on your pension savings and ultimately bequeath more to your beneficiaries.

Reasons Why You Shouldn’t Try to Time the Market

By | Investments

Regardless of whether you are a novice investor or an experienced one, timing the market is a temptation you should really try to avoid. Some people will claim they are able to predict market outcomes and make big investment returns but from our own professional experience, we can confidently say this is incredibly difficult and indeed there are far better ways to invest, in order to protect and grow your wealth.

A Tale of the South Sea

To illustrate our point of view, let us consider the case of Isaac Newton. Notorious for his groundbreaking scientific work, he is perhaps less well known for his role as an investor. Newton witnessed first-hand the growth of shares in the South Sea Company. In January 1720, these shares were trading at nearly £130. Yet 6 months later they had risen to over £1,000.

Sensing an opportunity, Newton invested. Yet he also suspected the rise in share price was unsustainable and decided to sell his stake before it crashed but this did not happen. In fact, the price continued to rise and so Newton decided to re-invest in the same company. It was at this point, as luck would have it, that the share price dived to £175 and Newton’s life savings were virtually wiped out in the process.

Perhaps those close to market speculation such as Warren Buffett with his insight, have a higher probability of success in timing the market but everyone else relies broadly on the same information with very limited knowledge.

Cognitive Biases

We have spent many years working with clients across Kent & the South East, speaking with other financial planners and following stock market investing. We have learned many things along the way, one of them being that people do not always make rational decisions in the world of investing.

Cognitive biases influence people’s investment decisions so the role of a good Financial Planner is to help clients identify and mitigate against their own biases, in order to make smarter decisions for their money. Quite often it takes an impartial, experienced observer to see identify something missing or draw attention to something that is perhaps more important than originally thought.

For instance, one common cognitive bias in investing is called the “bandwagon effect”. In this scenario, you invest in something because everyone else is. This makes the investment look less risky, because we think: “How can so many people be wrong?” Unfortunately, lots of people can all be wrong at the same time. There are countless examples throughout history of dozens of people rushing to invest in the next ‘big thing’, only to see it crash later that day, week or month.

Another cognitive bias is called the ‘gambler’s fallacy’. Just think about the times you have rolled a dice. If you roll four sixes in a row, you might start to believe that a six is less likely to come up if you roll the dice one more time. However, you face exactly the same probabilities as you did for each of the previous four rolls. We can often bring this thinking to our investment decisions. Like Isaac Newton, we might be tempted to sell because our investment has performed so well up until now. Yet, as we say time and time again to our clients “past performance is not necessarily a guide to future returns” in the world of investing.

Emotional Biases

Let us consider two scenarios. In scenario one, someone offers you two choices of either taking a guaranteed £400 home or giving you a 90% chance of taking £500. In scenario two, however, you get a different choice. You can either lose £400 or you can take a 90% chance of losing £500.

What would you do? Most would accept the guaranteed £400 in scenario one and then take the chance of losing £500 in scenario two.

Why does this tend to happen? It is because, broadly speaking, human beings tend to feel loss much more acutely than they do gains. So, if you are not careful, this can often lead to highly irrational, erratic investment behaviour. You might see your investment plummet in a short space of time, for instance, and the emotional loss you feel, drives you to want to sell before things get any worse. Yet this isn’t always the right decision. Sometimes, waiting things out even whilst others are bailing, is the best course of action. It is our job to help you see through this.

Fighting the Chimp Brain

Human beings are highly sophisticated and intelligent creatures, yet there are still parts of our brain that are considered ‘underdeveloped’ or even ‘primordial’. Such parts are known collectively as the Chimp Brain and they tend to exhibit the following traits.

  • Irrational thinking and/or behaviour
  • Decisioning making based on emotion
  • Jumping to a conclusion rather than waiting and weighing things up
  • Paranoid thinking
  • Catastrophizes
  • Seeing things as black or white, rather than shades of grey

With investments, it’s important to recognise this part of our human make up and the best way to deal with these traits is to recognise them when they emerge, put them into perspective, and then set them to one side.

5 Tips To Ensure Your Pension Lasts As Long As You Do

By | Pensions

There is probably no bigger financial worry for pensioners – and soon to be pensioners – than the thought of running out of money in retirement.

At FAS, we frequently encounter this fear when speaking to both new and existing clients. The good news is there are many practical, positive steps you can take now to ensure your future retirement is comfortable and secure.

Official statistics are showing that not only is the UK population growing but people are also living longer. This situation is likely to put additional strain on the State Pension when faced with the prospect that retirement could well be one of the longest phases in a British adult’s life.

It is therefore crucial that you plan as early as possible for your retirement to ensure you achieve the lifestyle you want when you eventually stop working.

Consider for a moment that the current basic UK State Pension would give you a weekly income of £125.95. Even with no mortgage borrowing and with greatly reduced monthly outgoings, this is barely enough for most to live on. You therefore need to look beyond the State Pension in order to achieve a comfortable retirement.

Many studies suggest that millions of people are ‘sleepwalking into pensioner poverty’ due to inadequate pension savings. Around I in 6 pensioners are living in poor conditions and complacency now is likely to cause this to rise in the not-too-distant future.

So, how can you ensure that you have a stable, secure income in retirement?

Here are 5 tips to get you started:

Take stock of your assets

Of course, this is the natural place to begin when starting to think about your retirement plan. Your assets include not just short-term savings but also property, investments, business assets, your State Pension, existing personal pensions and pension savings.

Make a detailed list of your assets and calculate their estimated value. If you are not sure of your assets’ value – such as your Final Salary Pension – you may well benefit from going through all of this with one of our Financial Planners.

Check your tax reliefs

It is quite possible that a number of your assets are not being used in the most tax-efficient way. In which case, you are needlessly giving money away to the taxman.

For instance, if you are a Higher Rate taxpayer then contributing towards a pension could actually reduce your taxable income. Remember, pension contributions receive tax relief at your marginal rate, so every 60p you put into a pension pot is currently boosted up to £1 by the Government.

Moreover, you might want to consider any workplace Salary Sacrifice schemes on offer in order to save even further on Tax. For instance, your employer could pay for car parking near your workplace in exchange for a reduction in your salary. Whilst this wouldn’t necessarily reduce your take home pay, you would pay less Income Tax and National Insurance contributions.

Work out your expenses in retirement

It is very easy to underestimate how much you will need in retirement. You may have well paid off the mortgage, the kids may have left home and there will be no more work commuting costs. However, research suggests that UK pensioners should aim for an income of at least £23,000 per year in order to have a comfortable retirement. As a minimum, you are likely to need around £18,000 to cover the essentials, such as household bills.

Of course, your State Pension should cover some of this but certainly not all of it. So, you need to take the time to carefully consider what you would like to do in retirement and realistically what your outgoings are likely to be when you give up work. Ask yourself questions such as, will you want a new car every 5 years? Will you want regular holidays? You’ll need to factor in those luxuries as well.

Take stock of your goals

Once you have gathered all of this information, it will need to consider your future in line with your financial goals. Now ask yourself, when do you want to retire? What kind of lifestyle do you want in retirement, and where do you see yourself living?

If you plan to retire early then bear in mind that you will not start receiving the State Pension until you meet the required age set by the Government. For many people, this will be aged 68. However, your pension age might be slightly earlier, so make sure your financial plan allows for this if you’re set on early retirement.

Get to know your pension options

There are a number of ways to use your pension money in retirement. Our Financial Planners help clients decide which of the available options is right for them. Here is some food for thought:

  • You do not necessarily have to start drawing your pension once you reach your retirement age – you could continue to work and keep the money invested so that it continues to grow.
  • It is not a sensible idea to withdraw all the money from your pensions as the majority will be taxed. However, you can withdraw up to 25% tax free.
  • For some people, keeping most of their pension money invested whilst drawing an income, works well. Income levels can depend on investment performance.
  • You could use your pension money to buy a financial product which gives you a guaranteed retirement income, for the rest of your life. Whilst this may appear an attractive option, it is not as flexible as the alternatives so we would always recommend speaking to our of our Financial Planners who can help you to make the right decision.