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January 2023

Hand holding magnifying glass on yellow background over the word Pension

Pension Wise – the need for proper advice, not just “guidance”

By | Pensions

The Pension Freedom rules, announced in the 2015 Budget, provided those with Defined Contribution pensions with much greater flexibility and choice as to how to draw their pension. Alongside the announcement of the new rules, the Government launched the Pension Wise service, which provides free and impartial guidance and information for those approaching retirement.


Pension Wise appointment

Anyone aged 50 or over, with a UK based Defined Contribution pension, can book an appointment through the Pension Wise service. The appointments last around 60 minutes and are carried out over the phone or face-to-face through Citizens Advice delivery centres. The purpose of the appointment is to go through the various ways you can access your pension savings and will also cover the tax implications of each option. It will also explain the ability for the pension holder to shop around, particularly in relation to the purchase of pension annuities, and help the user identify pension scams and avoid becoming a victim of what is sadly a growing trend.

Pension providers are now compelled to nudge consumers towards Pension Wise when they make direct contact with a provider to access their pension savings. Prior to June last year, pension providers were only compelled to signpost the Pension Wise service to those accessing their pension; however, the rules have been strengthened, so that the consumer who approaches a pension provider directly must be referred to the Pension Wise service prior to being able to access their pension.


What to do next

It is clear an appointment with Pension Wise may be a positive step and a way of arming yourself with information as to the options that are open to you. However, it is at this point that the crucial decisions need to be taken, where signposting and generic guidance won’t provide the answers.

The introduction of the Pension Freedom rules has undoubtedly been a success and put the control in the hands of individuals as to how they access their pension pot. However, the rules are now significantly more complex, and there are many variables to consider that a guidance service simply can’t take into account. Furthermore, depending on the action taken with the accumulated pensions, there may be no way of undoing a mistake which could prove costly over the long term. This is where independent and holistic advice can help you take the right decisions.


Looking to the long term

One of the first areas to consider is how your pensions are currently invested, and this is beyond the scope of a Pension Wise appointment. Flexi-Access Drawdown remains a very popular way of drawing benefits and this will mean that the pension remains invested for the long term. It is, therefore, crucial that the funds in which the pension pot is invested perform well and offer good levels of diversification. This is where a clear, defined investment strategy provides a significant advantage, although any investment strategy put in place should be reviewed regularly to ensure that the plan remains appropriate for your evolving needs and objectives.

Many people acquire a series of workplace pensions throughout their lifetime and holding multiple plans can make successful investment planning all the more difficult. One option is to combine plans into a single arrangement, and whilst this often provides advantages, it isn’t right for everyone. This is where taking tailored advice, rather than relying on guidance, can look at the specific options and advise on the right path to take.


Watch out for pitfalls

Different pension schemes and arrangements have varying rules, depending on the scheme. Some older style pensions, in particular, carry valuable benefits, such as enhanced Tax-Free Cash, guaranteed annuity rates or growth rates. This may not be immediately apparent from communications received from the pension provider and discovering the finer details of a pension arrangement is an important step to take before looking to draw benefits from a pension. Taking individual advice can discover all aspects of an arrangement and potentially avoid losing a valuable benefit by taking the wrong course of action.


The tax trap

The tax treatment of pension arrangements carries several traps, which the unadvised pension holder could easily fall down. For example, drawing a flexible income could mean that limits are imposed on making further contributions. Pension holders may also wish to access tax-free cash but taking an income may have an adverse impact on their tax position if they are still working. This is where a guidance service can only go so far and is no substitute for personalised advice.


Guidance is limited

Whilst a useful starting point for those approaching retirement, it is important to recognise that a Pension Wise appointment can only offer guidance on the options available. Pension Wise cannot provide advice, which is bespoke and takes into account your personal circumstances. This is where someone who has used the Pension Wise service may question their next steps and moving on to seek independent advice can help structure pension arrangements to suit the retirement you are aiming for.


Please speak to one of our experienced advisers who can provide the right advice tailored to your specific aims and objectives, here.


The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

Mature couple in their kitchen reviewing finances on their laptop - Understanding the Lifetime Allowance - the rising cost of retirement

Understanding the Lifetime Allowance

By | Pensions

Using a pension is a highly tax-efficient way of saving for retirement. Whilst there is no limit to the amount of pension savings that can be built up by an individual, any pension benefits drawn above a stated level are liable to an additional charge to tax. This is known as the Lifetime Allowance, and the allowance currently stands at £1,073,100.


History of the Lifetime Allowance

The Lifetime Allowance was introduced in 2006, and prior to this date, there was no limit placed on the value of pension savings. When introduced, the allowance was initially set at £1.5m and as one might expect, with prices rising over time, the allowance increased to £1.8m in 2012. This was, however, the highest allowance provided, and the allowance was subject to a number of gradual reductions to stand at just £1m by 2016. The allowance slowly increased in line with inflation after this date but was frozen at the current level in 2020. The Budget in March 2022 confirmed this freeze would remain in place until the 2025/26 Tax Year, which will lead to a further real terms reduction in the allowance, when adjusted for inflation.


How to value a pension against the allowance

For those with Defined Contribution pensions, considering the current value of pension savings against the allowance is relatively easy. However, calculating the value of final salary (defined benefit) pensions for lifetime allowance purposes is not so straightforward. For this type of pension, the annual pension accrued is multiplied by 20, although if a separate lump sum is provided by the scheme at retirement, this also needs to be taken into account.


Testing against the allowance

The value of pension savings is tested against the Lifetime Allowance when you start drawing a pension. In the case of a Defined Benefit pension, this will be when the pension comes into payment. For Defined Contribution pensions, this is on each occasion that income, or a lump sum, is taken from the pension. The allowance is also tested if you reach the age of 75 and have pension savings that have not been drawn, or if an individual dies before the age of 75 and hasn’t drawn their pension savings before death.


What is the charge

If your pensions are collectively worth more than the Lifetime Allowance when drawn, you are likely to face an extra tax charge. What this charge will be, depends on how much you exceed the limit by, and also the method by which you draw your pension. If the amount above the allowance is taken as a lump sum, the tax charge on the excess is 55%, or if the excess is taken by way of pension income (for example via drawdown or an annuity) the tax charge is 25%, which is added to any income tax due on the pension income drawn.


Planning ahead

As pension values increase, it is important that individuals consider whether they are likely to face a Lifetime Allowance charge. This is where future planning can be helpful, as an estimate of the likely position at retirement can be calculated by considering an estimate of the likely contributions that will be made in the future, and what growth could be achieved (in the case of a Defined Contribution pension) on the value of the existing pension pot.

Protections exist that enable an individual to benefit from a higher Lifetime Allowance, although there are strict criteria that need to be adhered to in order that the individual benefits from the protection.


Criticisms of the Lifetime Allowance

As tax relief is provided on contributions into a pension, it is reasonable that legislation places certain restrictions to avoid the pension system becoming too generous and costly to the Exchequer. The Lifetime Allowance, however, has long been the subject of criticism, as being punitive and a disincentive to long term saving.

One reason is that the allowance can be considered as a tax on growth, as the value of the pension pot is measured against the allowance when benefits are drawn, with no reference to the amount contributed into the pension.

The Lifetime Allowance has also been cited as a major reason that highly experienced medical professionals are opting to take early retirement. Given that many will breach the Lifetime Allowance by the time they reach 55, highly paid professionals may look to reduce their hours, or leave the profession altogether.  This doesn’t only affect the NHS, it also has an impact on individuals working in other skilled professions, for example the judiciary.


Holistic planning can help

For those who are already affected or may become liable to a Lifetime Allowance charge in the future, there are a range of options that can be considered, including ceasing or restricting contributions or reducing hours (or potentially taking early retirement). For others, it is best to approach the situation by considering methods of mitigating the tax charge that will apply on taking benefits. The crucial point is that one size certainly does not fit all, and this is where independent, holistic advice – taking into account all aspects of an individual’s circumstances – can be beneficial.

It is also important not to leave planning too late, as this affords time to make appropriate decisions.

If you expect to be affected by the Lifetime Allowance or would like to review your existing pension arrangements, please speak to one of our experienced advisers here.


The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

Graphic of 2023 with person sitting on it holding telescope representing looking ahead to the new year

A brighter New Year ahead?

By | Investments

Investors will be pleased to see the back of 2022, a year that brought war to Europe, a cost-of-living crisis and a looming recession. The start of a new year is naturally a time to be optimistic and look forward to better times ahead. Whilst risks certainly remain, there are good reasons to suggest that asset markets will enjoy a more positive year in 2023.


Fears of recession – Central Banks hold the key

2022 was dominated by inflation, which was driven markedly higher than expectations due to the economic effects of the war in Ukraine. The US Federal Reserve, Bank of England and European Central Bank raised interest rates over the course of the year in a bid to bring inflation back under control, ignoring the potential risks of pushing economies into recession. US inflation has now fallen consistently from the peak in June, which is a trend we expect will continue throughout 2023, and inflation in the UK may well now be past the peak.

The Fed have indicated that they are content to slow the pace of future rate increases, and indeed, we feel that rates across the Western world are not far from a pivot point. In the first quarter, we expect markets will continue to hang on every word uttered by central bankers, looking for a clear signal that they have taken the action they feel necessary to bring inflation under control.

Whilst the global economy may not fall into recession this year, a mild, shallow recession in the US, UK and Eurozone is a probable outcome. As economies contract, attention will then turn to central banks, who could look to ease monetary conditions by the end of the year. This could herald a significant change in market sentiment, and be a positive sign for asset prices generally.


Mind the gap

Following a difficult year for Equities, global market valuations now look more appealing than they did at the start of 2022. Weak price action over the course of the year has led to attractive valuations, particularly in sectors such as Technology. What isn’t clear, however, is whether earnings can match market expectations, or if recessionary conditions are sufficient to dent corporate earnings as 2023 progresses. Much will depend on how resilient consumers remain in the face of rising costs, and whether unemployment rises appreciably. Across the Western World, structural changes following the pandemic continue to lead to staff shortages in many industries, and we suspect unemployment may not be the issue that would ordinarily be the case as an economy enters recession.


Bond reset

The rapid rise in inflation and pace of interest rate increases during 2022 battered Government and Corporate Bonds. As a result, valuations have become attractive, and investment grade and Government debt now offer yields that look appealing, as interest rates are close to their peak and could potentially fall by the end of the year. Whilst it is tempting to look at the yields offered by higher yielding debt, default risk could rise and it may well be preferable to focus on credit quality during 2023.


Time to look East?

With growth likely to remain subdued in the US, UK and Eurozone, investors may well be tempted to look towards Asia and Emerging Markets for growth. There are clearly opportunities here, in particular in China, where their zero-Covid policies, which are now being eased, have hampered growth. Chinese Equities underperformed significantly over the last year and whilst valuations could be attractive, investors may need to be patient as Covid cases climb following the easing of restrictions, and concerns over the ailing property market continue. Japan also looks interesting, as inflationary pressures are lower here and domestic demand looks solid.


A more stable political year ahead?

Since the turn of the decade, investment markets have been buffeted by a series of external shocks, from the Covid-19 pandemic, to the war in Ukraine, a global inflationary spike and the potential for recession. Clearly, geopolitical risk has not gone away, as the war in Ukraine seems unlikely to reach a swift conclusion, and tensions between the US and China continue. The political landscape has also been unhelpful to investors, as continued uncertainty in Westminster and on Capitol Hill have weighed on sentiment. 2023 could, however, be a year where politics has less of an impact. The US mid-term elections are out of the way, and with the revolving door of number 10 appearing to have stopped spinning  – for now at least – we expect markets can focus on economic, rather than political factors, over the coming year.


Headwinds for housing

We fully expect the UK housing market to come under pressure during 2023. After strong growth over the last two years, a combination of higher mortgage rates, the cost of living crisis and economic uncertainty could lead to substantial falls in house prices. Of particular note are the number of borrowers whose fixed rate deals come to an end during the year ahead. This could stretch affordability for those looking to move, and with first time buyers facing headwinds, market activity could be subdued throughout the year.


Time to review your portfolio

After a bruising 2022, we feel there are many reasons to take a positive view on how investment markets will perform over the coming year. Equities valuations are attractive in many areas, and barring a significant slump in global earnings, offer investors good value at current levels. Staying at the defensive end of the Equities spectrum may be sensible during the first few months, although we feel high growth stocks may come back into favour later in the year.

Bond markets should also stabilise after the disappointing year in 2022, with attractive yields on offer. Investors may well be advised to focus on credit quality, given that recessionary conditions are expected.

Property investments could come under pressure during 2023. Commercial property valuations have already fallen back during the last quarter of the year, and could continue to struggle as the economy contracts. Investors in residential property will need to batten down the hatches as prospects for the UK housing market look testing for the year ahead.

The new year is a good time to review existing investment portfolios and determine whether they are invested appropriately in light of the expected conditions. Our experienced advisers are on hand to review existing strategies and provide independent advice on how best to invest for the year ahead…

If you are interested in discussing the above further, please speak to one of our experienced advisers here.


The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.