May 2020

May 21

Lessons From Five Years Of Pension Flexibility

By FAS | Pensions | No Comments

It’s been five years since pension holders were given the freedom to draw directly from certain pension savings. What have we learned that can help those about to embark on their own retirement journey?

The pension reforms in April 2015 gave defined contribution pension holders “complete freedom to draw down as much or as little of their pension pot as they want, anytime they want,” according to the Chancellor of the time. After five years of experience in the UK – and many more in places like the US and Australia that have had similar rules for longer – we can draw some conclusions about the changes, and derive some lessons for the future.

Despite the sceptics’ almost immediate warnings that pension pots would be frittered away on Lamborghinis or world cruises, leaving the State to pick up the pieces, it has not worked out that way. After an initial rush to fully encash pension pots, the average amount withdrawn per person quickly declined. By the final quarter of 2019, nearly four times as many people were receiving flexible payments as in the second quarter of 2015, but the average payment had fallen by almost two thirds.

Source: Official Statistics – Flexible payments from pensions (www.gov.uk)

The relatively stable pattern of average withdrawals over the last three years suggests that the gloomy forecast of spendthrift pensioners was wrong. However, there has been a continued decline in the purchase of annuities to provide retirement income. The latest data from the Financial Conduct Authority (2018/19) shows just 11% of pension plans being used to buy an annuity.

Drawdown pros and cons

If you are at the stage when you are beginning to consider your retirement, there are some lessons to learn from half a decade’s experience of pension drawdown:

A full withdrawal can make sense for small pension pots, even though 75% of the amount received is subject to income tax under PAYE. As the pot size increases, income tax and the operation of PAYE becomes much more of an issue. Full withdrawals account for nearly 90% of payments from plans valued below £10,000, but for only about 1% of pots of more than £250,000.
Flexi-access drawdown is by far the most popular means of drawing from pension plans valued at £100,000 or more. However, it is probably still too early to say whether those who choose this option without taking professional advice are making a sustainable level of withdrawals.
Flexibility in law may not mean flexibility in reality for your pension plan. Many providers of large group schemes, and insurers with pre-2015 pension policies, decided not to offer all the options that legislation permits. In some instances, the only flexibility is the ability to withdraw in full. If you find yourself with such a plan, you may wish to seek advice about transferring to a more flexible arrangement.

Whatever decisions you make about managing your retirement income, it’s a complex area. To make sure you understand your options clearly, it is imperative that you seek expert advice and a member of our Financial Planning team will be happy to assist you!

The value of your investments and the income from them can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Occupational pension schemes are regulated by The Pensions Regulator.

May 15

pregnant woman on sofa looking on at man and little girl playing with a piggy bank

Shifts In The Savings Landscape

By FAS | Investments, Savings | No Comments

Government incentives to save – like ISAs – are valuable, but recent changes to the savings landscape have opened up new opportunities while closing down some old ones.

If you are aiming to buy your first home, investing in a Lifetime ISA (or LISA) could be a great help. The recent withdrawal of the Help to Buy ISA in December 2019 means that the LISA is now the only tax-incentivised savings plan for first-time buyers. Anyone who had already taken advantage of the Help to Buy ISA during the four years it was available can continue to contribute to it until November 2029.

You must be between the ages of 18 and 40 (inclusive) to open a LISA, and qualifying savers can invest up to £4,000 per tax year. Like other cash ISAs, it grows free of tax, but they also benefit from a 25% government bonus. This is added to the contributions – so for every £4,000 invested, the government adds another £1,000. Once you turn 50, however, you will not be able to pay into the LISA or earn the 25% bonus. This bonus is a major advantage of LISAs compared with the Help to Buy ISAs, where the bonus was capped at £3,000.

Beware of penalties

The trade-off, however, is a withdrawal charge if you cash-in or withdraw from your LISA before age 60 and you are not using the funds to buy your first home (there is an exception for those who are terminally ill).

Ordinarily, the charge is 25% of the amount withdrawn, which recovers the government bonus and applies an extra charge to the original savings. This can be a trap for savers, who could actually end up with less than they paid in, if their circumstances change and they need early access.

However, as of 5th May 2020, there has been a recent relaxing of the withdrawal rules by the Treasury to allow for the current situation – LISA holders who withdraw money will face no penalty until April 2021 as the previous 25% of the amount withdrawn has been cut to 20% until April 2021, which is the equivalent of the bonus being taken back.

Child Trust Funds mature

For even younger savers, the first Child Trust Fund (CTF) accounts reach maturity in September 2020. Launched in 2005, the government contributed for children born between 1 September 2002 and 3 January 2011, when the scheme was closed.

New regulations will ensure that the freedom from UK income tax and capital gains tax will continue once the CTF has matured at age 18, even if no action is taken by the now-adult account holder.

Both the maturity of CTFs and the complex LISA rules serve as reminders that financial advice is important wherever you are on your savings journey.

Levels and bases of taxation and tax reliefs are subject to change and their value depends on individual circumstances. The Financial Conduct Authority does not regulate tax advice. Tax laws can change.

May 07

Overcoming The Gender Pensions Gap

By FAS | Pensions | No Comments

Women are saving more than ever into pensions, but they still lag behind men in retirement savings.

The good news is that the proportion of women who are now saving for their retirement has increased, along with their level of contributions, according to a recent report from pension provider Scottish Widows, which has tracked women’s pensions for the last 15 years.

Most of us are familiar with the gender pay gap. The idea of a “gender pension gap”, which sees women retire on far smaller pensions, is less well known. Although it is narrowing, equality is a long way off. Scottish Widows found that while 57% of women were now saving enough for their retirement, self-employed women and those in lower earnings brackets remain under-prepared for their retirement. Men are still saving more and benefiting generally from an additional £78,000 in their pension pot at retirement.

Why is there a pensions gap?

The main cause of the pension gap, unsurprisingly, is the pay gap. Women, on average, still earn less than men. Most people pay a fixed percentage of their earnings into a workplace pension, so this means less money is being invested for women’s retirement.

The fact that women are more likely to work part-time, or to take time out to look after young children or elderly parents, exacerbates the problem. Other life events, like divorce, can also impact negatively on women’s savings.

At the same time, women typically live longer than men, so if they are to enjoy the same standard of living in retirement, they ideally need larger pension pots – not smaller ones.

How to boost your pension savings

Some strategies can help bolster women’s savings options:

Maximise your savings: Join a workplace pension – your contributions are boosted by tax relief and contributions from your employer, which may increase if you pay in more. If you are self-employed, you don’t benefit from an employer’s contribution, but you can still benefit from tax relief on the money saved into a personal pension arrangement.

Get a pension forecast: Find out what you are likely to get from your State or workplace pension and when you can take them. If this isn’t enough to live on, you should aim to save more each month. The earlier you start, the better. The easiest way to obtain a State pension forecast is to apply online via the link. If you are unable to access online, you can complete a BR19 form to send in the post or request a statement by contacting the Future Pension Centre helpline 0800 731 0175.

Don’t overlook your partner’s pension: Some pensions will pay out to a surviving spouse or partner. If you are not married (or not in a civil partnership) you may need to sign a form to qualify. If your partner has more substantial pensions savings, make sure you aren’t losing out on this potentially valuable benefit. Aim to build pension savings in your own name, though, because if you rely on your partner, then you could lose out if the relationship breaks down.

Our experienced Financial Planners can help you review your options so do give us a call if you are unsure what route to take!

The value of your investments and the income from them can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Occupational pension schemes are regulated by The Pensions Regulator.

The Financial Conduct Authority does not regulate tax advice. Tax laws can change

May 01

How A Financial Planner Can Help During Divorce

By FAS | Divorce

Divorce is one of the most emotional experiences a person can go through and dealing with the financial implications of this can be one of the most daunting parts of it.

Most people use a solicitor to work through the legal aspects of their divorce but a Financial Planner can really help if your dissolution or financial situation is fairly complex. Needless to say, the financial decisions you make at this time will impact the rest of your life so its important to get the right type of advice at the outset. Handling things on your own can cause you to overlook things, but the appointment of an experienced Financial Planner means that you will be able to explore and be advised on all of the financial options available to you.

In this article, we present some of the key financial aspects of divorce that you need to think about and suggest some common mistakes to avoid.

Immediate Financial Aspects of Divorce to Consider

Naturally after a separation, the immediate financial concern is figuring out how to stay afloat. This is a very unpleasant time, as you go into survival mode. Can you afford to pay your bills, and will you be able to avoid falling into debt with some careful budgeting?

Your prime focus will be the need to provide financial stability for yourself and any dependents you are responsible for. Avoid making any drastic banking decisions such as switching to another provider, especially if you have not agreed this with your former partner.

Money is often tight after a separation, and it’s important that you do not fall into debt. Moreover, it’s crucial that you protect yourself as much as possible from the effects of your former partner falling into debt. As you will still be legally married at this point, this debt certainly will affect you.

If your spouse is the sole name on the mortgage for the family home, then you might want to consider registering a Notice or Restriction. You have a legal right to live there, and this helps in preventing your spouse from taking the unilateral decision to remortgage or sell the home.

Considering the Family Home

One of the trickiest aspects of any divorce is figuring out what to do with the marital home.

It might be in your children’s interests and in your interests, for one of the adults to remain living in the property. However, this might actually be a hindrance to you in terms of moving on with your life.

You also need to consider whether keeping the family home is the most sensible financial decision. Depending on your circumstances, it might make sense to stay put. In many cases, however, the more rational option is to move somewhere more affordable.

You will be faced with monumental, highly-emotional decisions. However, in our experience, we can help clients to bring a lot of clarity to this difficult situation. Indeed, many clients have contacted FAS after their marriage dissolution, thanking us for raising the question about the family home and for the guidance we have been able to provide and in helping them towards making a decision they might not have had the strength to carry out alone.

Other Important Areas of Divorce Planning

You are most likely to have marital assets other than your home which you will need to plan accordingly after a separation.

This is a key time for you to review your assets thoroughly with the help of an experienced Financial Planner. At FAS, we can help you establish what your assets actually are, where they are located and whether these are still appropriate for you, given your dramatic change in circumstances.

For instance, some common questions our Financial Planners present to clients include:

Has your attitude to investment risk changed since change in circumstances?
Is it now appropriate or sensible to keep your Buy-to-Let property?
Do you need assistance with any existing pension arrangements or Pension Sharing Orders?

Pensions may or may not need to be divided following your Divorce. It depends on your particular situation. In light of this, working with a suitably qualified Financial Planner can help you look at how this affects your own retirement planning.

Financial Mistakes to Avoid During Divorce

Focusing on the home and neglecting other areas.

Many people become highly attached to the family home during Divorce, especially where children are involved.

This can often lead to many taking over the mortgage borrowing during a divorce settlement in order to keep the family home but at the expense of losing a proportion of their spouse’s pension. In most cases, it is better to sell the marital home, buy something smaller, and take a slice of the former partner’s pension. Of course, this isn’t the right choice for everyone, which is why seeking the right guidance is essential.

Accepting an equal pension split

Whilst equally splitting your partner’s pension provision might seem the fairest course of action, you should carefully consider this option before agreeing to it. This will not necessarily result in an equal level of income in retirement. Quite often, it is better to push for an equal income share, rather than a simple 50:50 split of the capital so discussing options with a Financial Planner makes sense.

Failing to check valuations

This is where our Financial Planners often provide the most value during a client’s Divorce. Both spouses are legally required to disclose all their assets during Divorce, including businesses and pensions. However, these two areas are quite complex and it is possible to conceal actual values. A Financial Planner who is experienced in this field will be able to help you obtain the relevant documents you need in order to value these assets, ensuring you get a fairer deal in the final settlement.