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Pensions

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Pension planning and the importance of death benefits

By | Pensions

Since 2015, changes to pension rules have made it increasingly important to understand the options surrounding pension death benefits and how they are likely to be taxed. It is also essential to nominate who you wish to inherit your pension pot in the event of your death.

 

One of the most frequently asked questions regarding pensions is what happens to the accumulated pension pot when the pension-holder dies. The answer is that most workplace and private pension schemes provide ‘death benefits’ which the pension-holder’s beneficiaries will be able to claim after they pass away. But there are some important factors to be aware of.

 

Death benefits from defined contribution schemes

Since 2015, new pension rules have added an additional layer of complexity in how the death benefits available from defined contribution pension schemes are taxed. For example, if you die before reaching your 75th birthday, and you hadn’t started to draw from your defined contribution pension, it can be passed to your beneficiaries free from tax. As far as HMRC is concerned, your pension hasn’t entered into your estate for inheritance tax purposes.

In these circumstances, your beneficiaries have up to two years to claim the pension funds (after which point tax may be charged). They can then choose to take the remaining pension payments as a lump sum or use the pension funds to purchase an annuity.

Should you die before reaching your 75th birthday, but you have already started to draw your pension, then how you have chosen to withdraw your pension will determine the options available to your beneficiaries. For example, if you’ve already withdrawn a tax-free lump sum from your pension, and the withdrawn cash is in your bank account, this money will be counted as part of your taxable estate. However, if you have opted to take an income from your pension (known as ‘pension drawdown’), your beneficiaries can still access the remainder of your pension completely tax-free. They can also decide whether they want to receive that pension as a lump sum, through pension drawdown, or buy an annuity.

 

What happens after your 75th birthday?

Should you die after reaching your 75th birthday, your beneficiaries will be required to pay income tax on any pensions you leave behind. Beneficiaries will be charged at their marginal rate of income tax, meaning that a large lump sum death benefit could possibly push them into a higher income tax bracket.

 

What about annuities?

The rules around annuities, and whether they fall into the category of a ‘death benefit’ are a little more complicated. In most instances, once the pension holder has purchased an annuity and started to receive an income from it, the annuity itself cannot be passed on to beneficiaries after the pension holder’s death.

However, there are some types of annuities that are eligible for a pension transfer after death. Examples where beneficiaries could receive future payments tax-free can include joint life annuities, value protected annuities, and guaranteed term annuities, although some conditions are likely to apply. Because annuities are so intricate, it’s well worth reviewing the small print and getting professional financial advice before making any decision to purchase an annuity.

 

Why are death benefits important?

The changes to the rules around pension death benefits mean that pensions now offer a substantial inheritance tax advantage. For some pension holders, the ability to pass on significant amounts of their accumulated wealth to their children or grandchildren – without triggering an inheritance tax liability – is extremely valuable. It could be valuable enough to use up other income sources first, while leaving the pension assets untouched for as long as possible. Doing so could mean that your pension can be passed down to your chosen beneficiaries without any tax implications at all.

 

Nominating beneficiaries

To ensure your pension gets passed on in accordance with your wishes after you die, you need to let your pension scheme provider know who should receive the death benefits, by completing and returning an ‘expression of wish’ form that names your beneficiaries.

When you’re planning to name beneficiaries, you may want to take some time to think through the consequences of your decision. Upon your death, after the pension funds have passed to your beneficiaries, those funds will then follow the beneficiaries’ choice of successor. We have heard of examples where a surviving spouse was named as the beneficiary (instead of the children of the pension holder), and then remarried and left all of their assets to their new spouse and children from the new relationship.

To avoid unpleasant, worst-case scenarios like this, you can choose to name your children or grandchildren as beneficiaries or nominate for death benefits to be paid into a trust.

 

How can we help?

The new pension rules might seem complicated at first glance. But here at FAS, we have considerable experience of helping people who have accumulated large pension pots over their lifetime to turn these rules to their advantage. We can help you take the necessary steps to ensure your beneficiaries get the best value from your pension assets, without incurring significant tax bills.

 

If you are interested in discussing your defined contribution pension arrangements with one of our experienced financial planners at FAS, please get in touch here.

 

This content is for information purposes only. It does not constitute investment advice or financial advice.

Red mug with post its on reading Retirement Plan and Pension

Why every personal pension needs an annual check-up

By | Pensions

It doesn’t matter the size of your pension pot, it’s important to review your personal pension on a regular basis, to ensure everything is still on track to give you a retirement to look forward to.

 

There’s no hiding from the fact that pensions are uninteresting. Not only are they a guaranteed conversation killer at parties (remember those?), just thinking about pensions makes you feel older than your years. It doesn’t help that the pensions industry as a whole has made dealing with pensions unnecessarily complicated. People are put off by the technical jargon, and find dealing with the whole world of pensions a bit overwhelming.

 

So, it’s very easy to understand why even the most financially-aware people still view looking after their pensions as an unwelcome chore. It’s far easier to pay them minimal attention, and to simply let them chunter on in the background of our lives, isn’t it?

 

The problem is that for most people, their personal pension is the biggest financial investment of their lifetime, second perhaps only to their home in terms of the amount put in and the value it should accumulate. At FAS, we’ve been advising people on their pension arrangements for 30 years. Throughout this time, we’ve been reminding people that it’s not enough just to start a pension and then ignore it – just as you wouldn’t buy a house and then refuse to maintain it. You need to give your pension attention, and make careful adjustments every now and then. In other words, if you look after your pension, your pension will look after you.

 

Why is it important to regularly review any existing pension plans?

When clients ask us to review their existing pension arrangements for the first time, it can sometimes be quite an eye-opener, for them and us. That’s because of three reasons. First, the sheer number of different investment options available within a pension has increased dramatically in the last couple of decades. Second, how you choose to take your pension benefits has changed, and third, the pensions industry itself has become more sophisticated, more transparent, and far more competitive, meaning that pension management charges are fairer and conspicuously lower.

 

Are you paying the price for staying put?

Often these older pensions are invested in ‘balanced’ or ‘mixed asset’ portfolios that simply haven’t kept up with more modern investment strategies or techniques and therefore aren’t optimised to suit your individual needs and attitudes towards investing. Alternatively, you could be saving into a pension that is performing reasonably well, but where the fees being charged are taking a large bite out of your gains.

As with many products in modern day life, it sometimes feels as if you get penalised for being a loyal and long-standing customer. People in their 20s or 30s are most likely to be benefitting from paying into a pension that has low annual management fees (around the 0.5% mark), whereas people in their 40s, 50s, and 60s stand a greater chance of paying higher pension charges on older, less competitive products. Some of these pensions are charging closer to 2.0% annually. That might not sound like much, but those percentage points can add up to several thousands of pounds. And every pound paid in fees reduces the value of your overall retirement fund.

Poor returns and high fees can really act as a double whammy on a pension, eating into returns and leaving customers with a much smaller pension pot than they could have built up elsewhere. Of course, pensions companies have no incentive to lower the fees on these older, uncompetitive pensions, choosing instead to rely on the inertia from their customers.

 

Are new pensions always better? Not necessarily

Yet while some old-school pension providers are hoping to cling on to their customers through inertia alone, there’s more competition within the pension industry than ever before. In some respects, it has become almost too easy to transfer your pension from one provider to another. That’s why we think it’s so important to treat the new crop of online pension companies with a healthy dose of scepticism.

These online pension providers might promise a no-nonsense service that comes with low charges as standard, but this also means there’s little or no advice available on whether transferring your pension is the best thing to do. When it comes to pensions, it’s vital to remember that cheap isn’t always the best option. It’s far more important to get value for money, and to talk to a financial adviser who knows the right products to suit you.

Expert advice is particularly important when dealing with older pensions, which often come with lots of potential traps you could inadvertently step into. We can do the work to make sure you aren’t hit with costly exit penalties, or where transferring means you risk losing valuable benefits that are no longer available from today’s pension products, such as a guaranteed annuity rate. We can help to determine whether it is worth merging some or all of your older pension pots with your current one, and to find the right pension to suit your retirement plans and need for income or capital.


Final thought

Spending time to think about your pension might feel like something you want to put off indefinitely, but it really doesn’t have to take long and it could end up saving you thousands of pounds in fees and lower returns. If you think your pension would benefit from a review, the first step is to get in touch and book an initial telephone pension consultation with one of our pension experts. Let us do the hard work, because helping sort out pensions is something we love to help our clients with (even if we usually don’t talk about it at parties).

 

If you are interested in discussing your current pension arrangements with one of our experienced financial planners at FAS, please get in touch here.

This content is for information purposes only. It does not constitute investment advice or financial advice.

Lessons From Five Years Of Pension Flexibility

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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.

Overcoming The Gender Pensions Gap

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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

How Much Do I Need to Retire Comfortably?

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Many people are unaware of how much they need to save for retirement. We sometimes speak to clients who overestimate the amount needed, believing their retirement income should be the equivalent of their wage. Quite often this is unnecessary, as your outgoings are likely to be lower due to your mortgage being repaid, children leaving home and reduced outgoings (no more travel costs to work!).

On the other hand, there are also many people who vastly underestimate how much income they’ll need in retirement. Amounts vary depending on a client’s personal situation but currently, covering the basics is likely to cost £11,830 per year, per person. This average figure changes depending on where you are in the country; in Wales, the figure might be closer to £10,520. Here in Kent and the wider South East, the average could be significantly higher at around £14,270.

Of course, most people don’t just want to survive in retirement; they want to thrive too, enjoying a comfortable, well-earned “life after work”. However, how can you ensure you get there? We have devised this short 2020 guide to get you started.

 

What is a “comfortable retirement?”

According to Nationwide Building Society, 33% of British people expect their State Pension to meet their retirement needs. Yet in 2020-21, the full new State Pension is £175.20 per week, equivalent to about £9,110.40 per year. Looking at the aforementioned figures, this is lower than the regional average needed for covering the basics across the UK, let alone covering the extra expenditure you might need for meals out or the occasional holiday.

Indeed, people who rely on the State Pension (as important as it is for retirement planning) could be in for a nasty shock. Again, Nationwide’s research shows that, based on current pensioner spending habits, many of these people could face a £68,000 shortfall in their pension savings; equivalent to being about £400 out of pocket each month.

We can help you roughly calculate what you might need for a comfortable retirement but bear in mind that, as things stand currently, you could need at least two-thirds of your salary for a comfortable annual retirement income; e.g. possibly £27,000 – £42,000 per year. That said, this is a very broad estimation as your needs might produce a lower or higher figure.

 

How to make up a shortfall

There are many ways to address a potential shortfall in retirement income, and the sooner you act, the better. Here are some ideas to consider:

 

Maximise your State Pension

Whilst your State Pension is unlikely to cover all of your retirement expenditure, it is an important component of your retirement income. You need to make at least 35 years of qualifying National Insurance Contributions (NICs) to receive the full new State Pension. If you have gaps in your record, consider making voluntary contributions to “top them up”.

 

Workplace Pension

In 2020-21, if you are employed then you are required (under Auto-Enrolment rules) to contribute at least 5% of your salary into your workplace pension. Your employer must also put in at least 3%. Here, there can be significant opportunity to boost your pension pot by negotiating a higher contribution rate from your employer (amounting to “free pension money”), or by increasing your own contributions.

Suppose you earn £30,000 per year. If you contribute the minimum 5% to your pension and your employer 3% of your qualifying earnings, then your annual pension savings are likely to be £1,900.80. If you both continued to commit this total each year over 30 years, then with an average annual return of 5% on your investments, you are likely to accumulate about £132,601.31 (setting aside any tax relief, which would boost the pot further).

However, suppose you increased your contributions to 8% and your employer to 5%. This total annual contribution would, instead, be £3,088.80. Taking the same saving scenario, timeline and annual return outlined above, you could expect the total pot to reach £215,477.13. In such a case, increasing your monthly contributions by about £59.40 (i.e. from £99.00 to £158.40) and by persuading your employer to put in a bit more, you could grow your pension by £82,875.82.

 

Other assets

Of course, there are other ways you might address a future retirement income shortfall. If you have a second home, for instance, then this might release funds for your pension through its sale. The same might be said for a business or shares which you own. However, it’s important to consider these assets carefully, as a potential source of retirement income. Illiquid assets can be hard to sell, for instance, and you might not get as much for the sale as you currently hope.

If you are interested in discussing your financial plan or retirement strategy with a member of our experienced financial planning team, please do give us a call.

This content is for information purposes only. It does not constitute investment advice or financial advice. To receive bespoke, regulated advice regarding your own financial affairs, please contact us.

 

Where Should the State Pension Sit in Your Retirement Plan?

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The State Pension is unlikely to provide you with a comfortable retirement on its own, but it shouldn’t be overlooked.

The State Pension for 2020-21 is £9,110.40 per year. This assumes that you reach State Pension age after 2016 and have enough National Insurance credits. Some people may even receive more than this if they built up some additional pension before the rules changed in 2016.

This may well be enough to pay the bills, while your private pension can be directed towards other things.

It’s easy to fall into the trap of either ignoring the State Pension, or avoiding retirement planning altogether on the assumption that the State Pension will be enough.

Our belief is that the State Pension is important, and that you should build up maximum National Insurance credits if you can. However, this is just one part of a retirement plan, and where possible should complement a well-funded private pension.
 

How Much is a State Pension Worth?

The average salary in the UK is around £30,000 per year. This salary would incur National Insurance contributions of £2,460. This buys one year’s credit. You need to accrue credits for 35 years to build up a full State Pension, although you can start to earn a proportional State Pension with only 10 years’ worth of credits.

If you were to invest £2,460 per year into a private pension for 35 years, and achieved investment growth of 5% per year, you could build up a fund of £233,297.35.

You could probably safely withdraw 3% of the fund value every year and increase your withdrawals annually in line with inflation. This could give you over £7,000 per year. Not only is this less than the State Pension, it is not guaranteed, as it would be dependent on investment growth.

Of course, some people earn much more than £30,000, but many people earn significantly less, and are still able to accrue the same State Pension.

To be able to buy an income equivalent to the State Pension, you would need a fund of just under £300,000.

Clearly, the State Pension is a more valuable benefit than many people believe.

 

When Would You Like to Retire?

Depending on your age and gender, the State Pension is payable between age 65 and 68.

One of the main financial goals that clients tell us about is the desire to retire early. Clearly, relying on the State Pension does not allow for this.

You may wish to build up a fund to allow you to retire at age 55. But think carefully about your spending patterns. Most people spend more in the early years of retirement while they are still fit and well. Does it make sense for your income to suddenly increase (and to rise with inflation) at age 68?

A good financial plan will account for these irregularities. Perhaps you will have a personal pension, or even an ISA to fund your expenditure from age 55, with a cash reserve to cover any ad hoc costs. Your withdrawals can then be reduced alongside the State Pension, not only to preserve the fund, but also to make the best use of your tax allowances.

 

Filling in the Gaps

If you are not employed, there are other ways of building up a State Pension. For example:

  • Receiving Child Benefit for a child under the age of 12
  • Claiming unemployment benefits
  • Claiming disability benefits

If you are not working, and not receiving any of the above benefits, you can still accumulate a State Pension by making voluntary National Insurance contributions. In 2019-20, this amounted to £15 per week.

This is overlooked by many people who are not in work but think about what you receive in return. A year’s contribution of £780 buys 1/35th of a full State Pension – approximately £250 per year. No other pension or investment provides this level of return on your money.

Company directors have an added advantage, as they can draw a basic salary from their business (between £6,144 and £8,628 per year as of 2019/2020) and take their remaining income as dividends. At this level of salary, no National Insurance contributions are actually payable but are credited nonetheless.

You can check your State Pension Forecast at:

https://www.gov.uk/check-state-pension

 

The Disadvantages

If you are a salaried employee, paying National Insurance is not optional. For high earners, there is a chance that you will pay more in National Insurance contributions than you receive in return.

Of course, the other side of this point is that many people do not have the opportunity to build up much, if any pension provision, and the current system provides a safety net.

We also cannot ignore the government’s role. Pensions are an area of continual tweaking, with retirement ages rising, and many people questioning if they will receive any State Pension at all.

It used to be possible to pass some of your State Pension on to a spouse on death, if they didn’t have a full State Pension in their own right. This was quietly removed in 2016.

Again, a sound financial plan is the answer, as changes can be made in plenty of time to account for legislative developments. It is unlikely that the State Pension will be removed entirely.

While the State Pension is not perfect, it provides a solid foundation from which to build your retirement income.

If you would like to discuss retirement planning in more detail, please do get in touch. We can help you plan for the future.

Is Climate Change a threat to Pension funds?

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The Governor of the Bank of England made headlines following an interview with BBC Radio 4 on 30th December 2019. Mark Carney’s claim was that certain assets would eventually lose their value entirely due to climate change, and many pension funds invested in those assets (e.g. fossil fuels) are, therefore, at risk.

This has, understandably, caused concern amongst many retired people as well as those saving for future retirement, who are worried that their investments could be under threat.

What’s the link between climate change and pensions?

When you save money into a workplace or personal pension, it doesn’t simply go into a regular savings account. Instead, it goes into a set of investments, such as collective investments or unit trusts, together with capital from other investors. Each of these funds might contain a range of different companies which, as they grow, should provide a return on your investment.

Some of these businesses might be large or small, ranging across sectors or industries such as aerospace, transport, computing or energy. Each of these areas tends to come with a distinct carbon footprint (although different companies are likely to produce less or more, depending on their structure, operations etc). Businesses involved in fossil fuels or agriculture, for instance, tend to produce more CO2 than certain professional services.

Why does the Governor think certain assets might lose their value?

We need to take a step back for a minute to answer this question. Scientists across the world generally agree that a global temperature rise of 4C would have serious planetary effects, including 9m rises in sea levels, food shortages and unimaginable heatwaves. Mark Carney’s claim in the Radio 4 interview is that is: “If you add up the policies of all of companies out there, they are consistent with warming of 3.7-3.8C.” Carney’s belief seems to be that these companies (and the pension funds which invest in them) will face enormous political and consumer pressure in the 2020s, to address this dangerous trend. According to Peter Uhlenbruch at the Asset Owners Disclosure Project, those who fail to take action “May be facing significant exposure to unassessed climate-related transition and physical risks”, which could put beneficiaries’ savings at risk.

What is the financial sector currently doing to address all of this?

Under Mark Carney’s tenure as Governor (he is set to leave at the end of January 2020), the BoE introduced a radical new “climate change stress test” in 2019. The idea is to subject banks insurers and building societies to a similar stress test which they already undergo for their financials (e.g. financial stability), except the focus is on environmental sustainability. It is early days with this new scheme, but many commentators believe it will ultimately lead banks and other financial firms holding more capital to conduct specific types of business.

Two main types of risk are officially recognised by the BoE, regarding the potential financial impact in the UK of climate change. There is, of course, the direct physical risk posed by weather and temperature to infrastructure (e.g. flooding in England). Then there are also the risks posed by changing the UK more toward a low/zero-carbon economy. For instance, house prices could increase due to a requirement that each home insulated, or restaurants and supermarket sales could be impacted by an increase in the price of meat.

The climate stress tests introduced by the BoE are arguably a step in the right direction. Yet questions remain over how quickly financial firms and pension funds can adapt to this evolving regulatory landscape. At the time of writing, only a minority of institutions report on investments in fossil fuels, etc. Yet the BoE estimates that nearly “$120tn worth of balance sheets of banks and asset managers are wanting this disclosure.”

Should I be concerned about my pension?

At FAS, we would offer two pieces of advice at this stage. The first is not to panic about your pension, and the second would be to raise any concerns you have with us. The good news is that the BoE’s warning is likely to offer a huge incentive to the pension industry, encouraging them to invest more in companies which are accounting for changing consumer behaviour and regulations concerning climate change.

This content is for information purposes only. It does not constitute investment advice or financial advice. To receive bespoke, regulated advice regarding your own financial affairs and goals, please consult a member of our financial planning team.

 

Income Protection vs. Key Person Insurance: Which Do I Need?

By | Pensions

At a glance, Income Protection and Key Person Insurance might look like the same thing. After all, they both intend to help protect a business if someone falls seriously ill or is injured; although the latter safeguards against death, as well.

In broad terms, Key Person Insurance is designed to protect a company’s financial interests. Income Protection, however, is intended to look after an individual and their family (i.e. following a serious injury or diagnosis of illness, which prohibits the person from working).

In this short guide, we have provided a summary of the key similarities and differences between Income Protection and Key Person Insurance. We’ll also be suggesting some scenarios where either might be appropriate to consider.

Key Person Insurance

If you are a Director or an important stakeholder in a particular business, then you will likely want to consider the benefits of Key Person Insurance. Essentially, it is a type of insurance which helps to ensure the business has access to much-needed funds if a key person, shareholder or decision-maker dies.

Some insurance policies will offer Critical Illness Cover (CIC), which could provide an emergency lump sum to the business if a key person can suddenly no longer work due to certain illnesses or injuries. If you are considering adding CIC to a Key Person Insurance policy, then it is important to check the details carefully with one of our Financial Planners. Certain illnesses and injuries might not be covered under different policies. You might need to balance the premiums of the policy with its conditions, as comprehensive policies are likely to be more costly.

Please speak to us about the tax implications of a Key Person Insurance policy. For instance, if you take out a policy for “business continuity purposes” then you should be able to treat the insurance premiums as a tax-deductible business expense. If, however, you are thinking about using Key Person Insurance to protect a loan, then the policy will likely not qualify as “tax-deductible”.

Key Person Insurance can be used to achieve a range of goals, including:

    Repay loans which might need settling.
    Providing funds to help close the business in a methodical, non-chaotic way.
    Open up a financial “safety net” to mitigate against a possible loss of profits.
    Supply funds for staff training and recruitment purposes.
    Provide much-needed funds for projects and developments.

Income Protection

As mentioned above, Income Protection exists primarily to protect an individual and their family, should they find themselves no longer able to work due to injury or illness. Should this, unfortunately, happen to you, and you have taken out such a policy, then if you meet its conditions you should be entitled to up to 80% of your pre-incapacity salary.

Sometimes a business will pay for an employee’s policy (e.g. a Company Director). In which case, this is usually called “Executive Income Protection” or EIP. Similar to Key Person Insurance, EIP can be treated as a tax-deductible business expense.

It’s worth noting, however, that if the policy’s conditions are met then the benefits are paid directly to the business, not to the individual. This means that when the company then distributes this post-incapacity, replacement remuneration to the employee, it will be subject to tax. So, it’s worth running this by us to ascertain the best way to distribute this in a tax-efficient manner.

In many cases, an individual will simply take out a policy themselves rather than a business taking it out on their behalf. Income Protection can be an attractive option for self-employed people, who typically do not otherwise have a means of attaining “sick pay” (since they have no employer to pay it).

Bear in mind that these self-funded policies are not tax-deductible, since you will likely be paying for the premiums using post-tax income. The good news, however, is that the benefits you receive from the Income Protection policy are usually exempt from tax.

Final Thoughts

Many businesses recognise the value of certain types of insurance to protect their assets and future growth prospects. Public Liability Insurance, for instance, is crucial for protecting your business against compensation claims levelled against you by customers. Employers’ Liability Insurance will help to cover you if such claims emanate from your staff.

However, as many as 3/5 small businesses in the UK admit to having no succession plan. Nearly 90% of the UK’s registered companies comprise businesses which employ fewer than 5 people, which are especially vulnerable if a key person was suddenly removed from the picture. This vulnerability, in turn, can hold businesses back due to investor reluctance or maintaining lines of credit.

If you are considering Key Person Insurance or Income Protection as a possible solution to your needs, then act swiftly. According to the ONS, a 35-year-old man has a 1/62 chance of dying within the next ten years. By the age 45, the chances change to 1/29 and by age 55, the chances are 1/12.

At FAS, we offer financial planning and advice on a wide range of business and income protection solutions. If you are interested in exploring your options, please do give us a call.

A Short Pension Guide for Your Grandchildren

By | Pensions

Did you know that in 2019-20 you can put up to £2,880 per year into a pension for your grandchild (i.e. £240 per month), regardless of their age?

Conveniently, this £2,880 also falls into the £3,000 annual limit on gifts, which are exempt from Inheritance Tax. Moreover, any money which is placed into your grandchild’s pension receives tax relief, effectively acting as a Government “top-up” to your contributions. This tax relief amounts to 20% on the contributions. So, if you put the full £2,880 per year into your grandchild’s pension, they would also receive £720 in the form of tax relief. To be clear, a grandchild can only receive one annual net payment of £2,880 into a pension so two grandparents cannot contribute £2,880 each.

All of these benefits can lead many grandparents to seriously consider making contributions to a grandchild’s pension as they feel it allows them to leave a more meaningful Inheritance to their beneficiaries via Inheritance Tax reduction.

Pensions for Grandchildren: Pros & Cons

As you know, today’s UK State Pension is unlikely to cover most people’s outgoings in retirement. With both the UK’s overall population and life spans projected to increase over the coming decades, the pressure on future Government’s pension budgets is likely to be stretched even further.

In light of this, the main advantage of setting up a pension for your grandchild is so you can potentially make a significant difference to their financial future by:

    Reducing their future reliance on the State Pension.
    Reducing the pressure of them having to make their own pension contributions.

The other attractive benefit to starting a pension for your grandchild (particularly if they are very young) is that the funds you invest in have more time to grow.

For instance, let’s give some thought to how much a single lump-sum contribution of £2,880 into your grandchild’s pension could potentially grow over 30 years, 40 years and 50 years (assuming a 5% annual rate of return). Whilst there are many variables to consider, broadly speaking values could be in the region of:

After 30 years: £12,447.19
After 40 years: £20,275.17
After 50 years: £33,026.11

However, the main disadvantage to consider before setting up a pension for your grandchild relates to accessibility. Under the existing pension rules in 2019-20, you cannot access money in your pension pot(s) until you are at least 55 years old.

So, if your loved one wants to use the money for a house deposit, to cover wedding costs or to help fund their way through University, then they will most likely be unable to do so. Bear in mind that the age you can access your non-State Pension(s) is also set to rise to 57 by 2028 and is it possible that this could rise even further in the distant future.

Some clients prefer to gift money to their grandchild’s Junior ISA or other investment, whilst committing other funds towards their pension. This way, the grandchild can benefit from having investments building for their future retirement, whilst allowing easy access to other funds they may need for a house deposit, wedding or another important life event.

Choosing a Pension for Your Grandchild

Certain types of pension are prohibited when setting up a pension for a grandchild. For instance, you cannot set up a workplace pension on their behalf. However, you should be able to arrange a Personal Pension Plan.

As there are different types of Personal Pension to choose from, it’s a good idea to speak to us first. You could choose to open a SIPP for your grandchild (Self-Invested Personal Pension), which can offer a fairly wide range of investment choices, but bear in mind that these pensions can often carry higher charges when it comes to investment management fees so its best if we are involved to help you find the most competitively charged contract. We can help you choose the right SIPP from the wide range available including “Child SIPPs” or “Junior SIPPs” targeted specifically at grandparents who are interested in setting up a pension for their grandchild.

Are you set to get the best State Pension deal?

By | Pensions

The State Pension is the money you get from the Government to provide you with an income in retirement. This might sound straightforward enough but the system is actually quite complex.

The system can be a bit of a minefield but it’s important to understand it as your State Pension entitlement could have a big impact on your future retirement lifestyle.

In this article, we will briefly cover how the State Pension works, how to calculate the level of State Pension you are likely to receive in retirement and ways in which you could get a better deal from the Government.

What is the State Pension?

State Pension rules changed in April 2016 which made them more difficult to understand. Before this happened, people received a “basic” State Pension when they reached retirement age and in some cases, certain individuals received an “additional” State Pension.

So, if you reached retirement age before April 2016 then in the 2019-20 financial year, the basic State Pension making its way to your account should be £129.20.

If, however, you are set to retire after April 2016, your State Pension will operate under the new rules and you should receive a “single-tier” State Pension when you reach retirement age (sometimes referred to as “new State Pension”).

In 2019-20, the amount you receive under the full, new State Pension is £168.60 (about £8,767.20 per year). We highlight the word “full” because you may not actually receive this amount as it is dependent on your personal circumstances.

If, for example, you have not built up 35 years of qualifying National Insurance contributions (NICs) then you are unlikely to receive the maximum £168.60 available. On the other hand, if you have accumulated an “Additional State Pension” then you may well receive more than this.

It is worth mentioning briefly that it has not been possible to build up any additional state pension (sometimes called the “Second State Pension” or “State Earnings-Related Pension Scheme”) after April 2016. However, you may have prior to this date, as you approach your retirement age after 2016.

You might be wondering what your “retirement age” is (i.e. the point where you can start claiming your State Pension). In 2019-20 it is between 65 and 66 for everybody which is set to increase in future years. So, for instance, in 2028 it will be 67 and by 2039 it will have risen further to 68.

How much will I get?

As mentioned above, how much money you get from the Government in retirement depends on a range of factors, including:

-Whether you reached retirement age before April 2016. Certain groups of people get more, or less, than others under the old system compared to the new one.
-How many years of NICs you have built up (remember, you need at last 35 to get the full, new State Pension).
-Your pension credit status. This an extra, means-tested source of income for retired people who are struggling financially. You must meet certain criteria to be able to claim this benefit, which we will come to below.
-Any Additional State Pension you may have accumulated.

The other important thing to remember is that to get any kind of State Pension, you must have at least 10 years of qualifying NICs.

How to get a better State Pension deal

Clearly, if you are still working and will be for a good few more years, then one important way to get the best pension deal is to make sure you build up at least 10 years of NICs throughout your employment.

Better still, try to meet the 35 qualifying years to ensure you become entitled to the full, new State Pension when you reach your state retirement age. In general, those in full time employment earning over £166 a week should be making NICs automatically via their employer, under the Pay-As-You-Earn system (PAYE).

Looking forward, it may well be that you will fall short of the 35 years’ worth of NICs through your future employment. Should this be the case, it is possible to “top up” some of your previous years where you did not make a qualifying year (e.g. because you lived abroad), by making voluntary NICs. Another option could be to consider deferring your whole State Pension, which can sometimes result in you receiving a higher income from the Government when you do eventually claim it.

You can check for gaps in your NI record on the government’s website.

For expectant parents, you may be wondering what could happen to your NICs if one or both of you intend to take time off work to look after your child.

This situation can become quite complicated but generally speaking, if you are over the age of 16 and your child is less than 12 years of age, you should receive “Class 3 National Insurance credits” if you are receiving Child Benefit. These credits allow you to fill gaps in your NI record, even if you are not working.

Another option couples may wish to consider is making voluntary NICs on behalf of a spouse or partner so they can build up their own full new State Pension record.

Final thoughts

We hope this has helped with the basic aspects of the State Pension which may affect you but there is a lot more to consider when factoring your State Pension into your overall retirement plan so please do get in touch if you wish to explore this further.