Archive for the ‘pensions’ Category

What’s My Pension Worth?

Friday, June 12th, 2015

FB - PensionsWorthIt’s hard to argue about the importance of saving for old age.  Those still of working age need to look at how they are going to finance their later years.

Those already retired need to think about getting the most out of their available finances.  The exact rules around pensions and savings can be changed in line with government policy at any given time.  Indeed the pension system has just been through an overhaul and with an election looming, politicians of all colours are setting out their plans for the future of pensions and the pensions of the future.  In reality, however, these plans only have any meaning to people who are focused on saving for retirement.  Let’s therefore look at some key questions on the topic.

What Is A Pension Pot?

Quite simply a pension pot is a common term used to describe savings which are specifically to finance retirement.  People contributing to a pension pot may get assistance from the government (in the form of tax relief) or from an employer (in the form of contributions).  Pension contributions are usually locked away until you reach retirement age.

How Do I Calculate My Pension?

There are plenty of online calculators to help with this.  It’s strongly recommended to keep track of how your pension is doing so that you know where you stand.  If you do decide you need to take action, sooner is usually better than later.

I Don’t Like What I’m Seeing, How Can I Build A Healthier Pension Pot?

You have three options.  You can save more money, you can manage your savings more effectively or you can do both.  It can help to look at this question in the light of your overall financial situation.  For example if you are carrying high-interest debt, such as credit-card debt, then it may well be in your best interests to focus any spare cash you have on paying this down.

Once you have cleared your debt, you can then divert the funds to building your pension.  If you do have spare cash and are in employment, then it may be useful to look at making extra contributions to your workplace pension.  This can be particularly helpful if your employer will top up any contributions you make.  If you’re unsure about locking cash away until you retire, then it may be worth looking at ISAs as an alternative.  Although contributions to ISAs are made out of post-tax income, generally speaking the income they generate is tax-free and the money in them remains accessible if you need it.

What Do I Need To Know About Getting More From My Pension Pot?

For many years getting more from your pension pot generally meant getting the best deal on an annuity.  Now there are vastly more options for those with pension pots.  With this in mind, it can be very helpful to get some professional advice before taking any significant decisions on how best to use your pension pot.

It is also advisable to keep up to date with any changes which may affect pensions.  For example at the current time, the Conservatives have a proposal to allow holders of annuities to sell them on.  If enacted this could have massive implications for existing pensioners.

It’s also worth remembering that, generally speaking, pensioners have access to the same savings and investment products as those of working age.  For example they get exactly the same ISA allowance as working adults. There are even some savings products tailored specifically to their needs (e.g. pensioner bonds). These can all help pensioners to make the most of their finances.

Will I Benefit From The Pension Reforms If I’m Already Retired?

Friday, June 5th, 2015

FB - PensionsOne issue in the world of personal finance has dominated the headlines for months; the changes to Britain’s pensions industry that will have profound implications for savers and retirees for decades to come.

Much of the focus of the reportage has been on the effects of the changes on savers waiting to retire, but there are equally far reaching changes afoot for those who have already finished their careers and are enjoying their retirement.

In this article, we will explore what already retired pensioners need to know about their rights and entitlements under the new pension laws that come into effect this year.

What is an annuity?

There are currently five million pensioners living off annuities, insurance products bought with a pension lump sum that guarantee an income for life.

Because many annuities were virtually compulsory on pension policies until 2014, there has been less incentive in the market to provide competitive products that provide value for policy holders.

Why are annuities so bad?

This means that while some annuities have performed well and are offering pensioners a decent income in retirement, others pay out poorly every month.

Impoverished pensioners have been left feeling frustrated, with large sums invested but weak returns limiting their ability to enjoy the rewards of a life of work.

New rules now allow pensioners who hold annuities to sell disappointing policies, enabling them to regain control over their investments.

What can policy holders do?

Selling your annuity for cash will be possible from the financial year 2016-17.

The chief purchasers are likely to be the pension companies themselves, many of whom have already encouraged Pensions Minister Steve Webb to help develop the market.

However, it will not be possible to simply return an unwanted policy to the company you bought it from for a refund.

How do I sell my annuity?

The trade in second hand annuities could result in a new derivatives market where bundles of policies are packaged together and sold, which means that insurers will be keen to buy ‘good’ annuities and avoid ‘bad’ ones.

An annuity policy must stop paying out when the original holder dies, therefore insurers will be wary not to buy back policies from holders in poor health.

This will have implications for policy holders, who will possibly be required to pass a medical examination in order to get the best price for their policy.

How much is my annuity worth?

At the moment, selling your annuity attracts such massive tax penalties that there is no point in doing so.

The minimum tax levied on an annuity sale is 55 percent, with some policies attracting rates of up to seventy percent.

The lump sum that you receive will be taxed at standard income tax rates, so if you have no other income and your lump sum falls within the basic income tax band (say £30,000), you will be taxed at 20 percent. This means a tax bill of £6,000.

This is of course, far better than a tax penalty of over 55 percent, but by no means ideal.

The Chancellor has suggested that for many pensioners with good policies, the best strategy is to hang on to them. The new market for annuities does not exist yet and will take at least a year to evolve, which gives annuity policy holders time to get advice.

Find My Pension

Friday, May 29th, 2015

FB - FindSome things are so easily lost. Car keys, mobile phone, wallet, or you entire financial future.

At any given time a staggering five million people have lost track of their pension providers, like squirrels who bury acorns but forget where they put them.

The result of a lost pension may lead to a diminished income at retirement age and eventually the Treasury benefitting from the unclaimed wealth.

The government, keen for individuals to be as minimal burden on the state in their dotage as possible have launched the Pension Tracing Service which will help to find missing pension pots.

Finding them, however, is not the end of the story.

Reunited with your long lost pension

Pension pots need to be monitored in order to get the most out of them and to ensure your retirement is a time in your life you can enjoy.

Each pension pot that you have is subject to management charges and possible other annual costs.

In addition to this, some of the pension pots that you have might not have been performing as well as others.

Not all pension funds accumulate wealth as efficiently as others and therefore it is important to closely scrutinise how well your money has actually been performing over the years.

Once you have worked out which pension pots are performing and which are not, you need to explore your options.

Some pension plans might have benefits or guarantees attached to them, so make sure you know the long term consequences of any financial decision.

In addition to this, pensions that have a clause enabling you to retire earlier, or pensions that give you the option to draw down higher than normal lump sums cash free are also valuable and potentially worth keeping.

If you would like to review your pensions and assess the performance, it might be a good idea to seek some financial advice.


Fancy Retiring to an Exotic Marigold Hotel?

Friday, May 8th, 2015

Fancy Retiring to an Exotic Marigold Hotel?In the UK today 40 percent of people consistently put away too little money each month to fund the cost of their retirements. Too many people simply spend for today being unaware that tomorrow waits for nobody.

Throughout the working lives for many of us the day on which we will need to draw on our pensions seems consistently far away.

Even for those lucky enough to be enjoying their youth in a carefree way, the fact remains that by failing to invest in the present, the time they enjoy is being waste.

The government has announced in the last twelve months a huge series of changes and shake-ups in the pension market and savers will have more freedom than ever before to decide how they access their pension savings from the beginning of the new tax year.

The question of how much to put away each month into a pension is a complex one and in this blog, we will address what you need to consider before you arrive at a fixed sum.

The first thing to consider is what type of lifestyle you hope to enjoy once you’ve retired and at what age you see yourself retiring.

Many people leave their working lives before reaching the once statutory 65, and age discrimination legislation now prevents mandatory retirement at any age.

It is possible, therefore, to retire earlier or later, but you will need the finances to sustain you.

The rather bleak question of how long you will live in your retirement also needs to be addressed.

New pension rules ending the compulsory purchase of annuities means that when you do retire, a portion of the pension pot could be used to pay off debts such as mortgages.

This will leave savers with less of a recurring monthly income but also lower overheads and more security.

The chances are that if you are reading this, you may already have a pension plan. If you are a UK tax payer, you may also have access to a state pension through paying national insurance.

This means that you might be in a better position than you thought, so a first step should be an audit of what savings and investments you have.

The government’s Pensions Tracing Service, can help you find any obscure pots of money that you are entitled to. Alternatively if you would like some advice or help in devising a pensions strategy for the future or finding a pension fund that suits you, why not speak to a professional adviser.


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Is The State Pension Like Jupiter Ascending?

Friday, May 1st, 2015

Is The State Pension Like Jupiter Ascending?The film Jupiter Ascending is arguably a sci-fi version of Cinderella. Jupiter (Mila Kunis) lives a life of drudgery until she discovers her true destiny. The new state pension rules aim to save those planning for retirement from a life of penny-pinching. In short those reaching state pension age from April 2016 will receive a substantially higher state pension (about £148 per week instead of £113.10 per week) – but they will have to pay National Insurance (NI) for longer to get it. Until April 2016, you can claim a full state pension with 30 years’ NI. After April 2016 you will need 35.

A Quick Guide to NI and the State Pension

If you are employed then you will be paying National Insurance and therefore contributing to your state pension. If you are self employed and earning £5,885 or less you can choose whether or not you pay NI. Obviously your choice will affect your entitlement (or otherwise) to a state pension. For those taking a career break to raise children, registering for child benefit will ensure that NI continues to be paid. This means that in terms of an overall financial plan, it can be worthwhile registering for child benefit even if your family’s overall income is too high for you to receive any money directly. It could also worth noting that these credits can be transferred to working age-family members who provide childcare e.g. grandparents. In other words, if you are working and therefore building up excess NI contributions through child benefit, you can pass the NI credits from child benefit to other people who actually can benefit from them. This may be a substantial boost to them in terms of their own money management.

A Note Regarding Contracting Out

Under the current system, there is essentially a two-tier state pension. There is a basic state pension and an additional state pension. At this point, under certain circumstances, people can opt out (contract out) of paying NI towards the additional state pension. Put quite simply, as of April 2016, this option will cease. The government has a formula in place for calculating where people who have contracted out stand in terms of NI payments. Anyone in this situation can register at (or to get a project of their pension entitlement. This could be a useful exercise for other people too.

Alternative Pension Choices

Politicians of all persuasions are united in their concern over the potential effects of an ageing population saving too little for their retirement. Because of this, they are becoming increasingly active in their attempts to motivate people to save in the here and now to pay for their future. Auto-enrolment into a workplace pension scheme (“We’re all in”) is one example of this. Of course, any individual’s ability to save voluntarily into a pension scheme depends entirely on their ability to meet their needs in the present. It is also fair to say that there are other options for saving for retirement, some of which offer tax efficient options (e.g. ISAs). However, the fact that pension contributions attract at least some degree of tax relief is a clear and potentially significant benefit to saving for retirement through a pension fund. This benefit can be further enhanced with contributions from employers. Therefore, while saving into a pension may not be right for everyone, it is certainly an option which deserves serious consideration.

In short

It’s never too early to start saving for retirement and even late is better than never. The more effectively working-age people plan for the time when they will no longer be working, the likelier it is that they will be able to enjoy the experience of being retired.


How Much Should You Take Out Of Your Pension Pot?

Tuesday, April 14th, 2015

How Much Should You Take Out Of Your Pension Pot?No one is as wise, prudent or capable of self restraint as they think they are. When we think of a large sum of money, £100,000 say, we tend to think in terms of what it might buy: An incredible car, several years travelling round the world, a large new extension transforming our house into a dream home, or continued financial security in our old age?

The latter is, of course, less exciting, less glamorous, and less fun, but far more important, which is why, after 6th April this year, savers who become eligible to draw down their pensions need to exercise a degree of caution.

Last March the Chancellor of the Exchequer, George Osborne, announced that annuities, the insurance policy taken out against the value of your pension, guaranteeing a monthly income for life, would cease to be compulsory.

This means that pensioners can now access as much or as little of their nest egg as they like in a lump sum, and then commit the rest to an annuity or a different kind of policy thereafter.

The question, however, is how much can one withdraw from a pension before it ceases to be a viable savings pot?

Twenty years ago, the financial advisor William Bengen calculated what he believed to be an exact figure for the amount an investor could withdraw annually and maintain the same standard of living.

Bengen, who lived and worked in the USA, based his calculations on a portfolio of US stocks and bonds, divided evenly between the two. He assumed that on average, bond returns would be 2.6 percent and the return on shares would be 8.6 percent.

He also assumed that the total length of time that a person would be drawing on a pension for would be thirty years and on this assumption he argued that each year; a total of four percent of the overall pot could be withdrawn without running out of money.

However, all such calculations reflect the era in which they were made and the investment world 20 years later, post 2008 crash is very different.

There are plenty of economists and advisors who now argue that Bengen’s projections are flawed and do not match the current investment realities of our age.

A new study into pension draw down by Michael Finke, Wade Pfau and David Blanchett, published in 2013, titled “The 4 Percent Rule is Not Safe in a Low-Yield World,” state that pension companies cannot rely on Bengen’s rule any longer.

A larger population than ever before is reaching retirement age and the growing wealth of previously poorer countries with high savings rates is attracting more and more capital away from UK and US companies.

These factors combined mean that in 2015 we exist in an economy where yields of investments are much lower than when Bengen first calculated his four percent rule.

Because portfolios on average are not performing as well as they once did, one cannot rely on the same figures and arguably one should try to draw down less, or perhaps not draw down at all.

This might sound like an argument for re-instating annuities, and savers who want those kinds of guarantees can buy annuities if they choose.

Before committing yourself to any course of action with your pension, it is always advisable idea to get some practical advice, in fact most pension companies will insist on this.

The market for pension investments is fluid, complex and difficult to predict, so it is often worth accessing some impartial financial expertise before making decisions about your financial wellbeing for the rest of your retirement.


How To Benefit From The New Pension Rules

Wednesday, April 8th, 2015

How To Benefit From The New Pension RulesHere’s an unsettling mortal thought: When do you think you are going to die?

It’s a question we generally seek to avoid, though thanks to recent changes in the pension market, it’s a question that’s taken on a new significance.

Decades ago, one retired at sixty five and, on average, drew a decade of pension entitlement before departing for the sweet hereafter.

In 2015, some of these certainties have gone. Not only are many of us taking early retirement, but equally as many are facing a future where they will have to work on for many years.

We have longer life expectancies than ever before and this means longer retirements to plan for.

As of March last year, and coming into effect from 6th April 2015, savers accessing their pensions will no longer be forced to purchase an annuity.

Annuities are insurance products that pension savers bought with the lump sum of their pension, which in turn guarantee them a monthly income for the rest of their lives.

Since this will be made non-compulsory, pensioners have been allowed to spend their lump sum in whatever way they see fit.

This new found freedom has both benefits and drawbacks. Greater flexibility in the way savers draw down their pensions means more choice for millions, but it also means that there is the potential for serious financial problems later on.

Let the saver beware

Pensioners with large sums of money to spend need to be wary of investments that sound too good to be true.

In addition to this, even if they are investing their in thoroughly reputable funds or buying property, it is essential that they work out exactly how far their savings will go.

Thinking of one’s own life expectancy, the amount of returns that the investment will yield, and the standard of living ideally one might like to enjoy are all crucial considerations.

Savers must also consider the potential rise in the cost of living as inflation is guaranteed to erode part of any savings in the long run.

Very few pensioners will make genuinely foolish decisions and blow their life savings on a Ferrari, but there might well be a significant number who seriously miscalculate how much they will need to live on and wind up with major financial problems later on.

Getting advice

Retirement is supposed to be a time in life where the hard work of the previous decades pays off and life can be enjoyed, but without a sound financial basis, this is impossible.

It is for this reason that pensioners who access their annuity free lump sums should seek some professional financial advice as a priority.

Financially planning a retirement is difficult, and for many of us, managing it alone is a complex and demanding process.


Is A Self Invested Pension Right For You?

Thursday, April 2nd, 2015

Is A Self Invested Pension Right For You?In the past year, due to pensions reform,  the UK pensions market has undergone radical change and savers will have more autonomy and more choices now than ever before after 6th April 2015.

Whilst this is undoubtedly a positive development for many, it also means that savers need to be better informed than ever before about the benefits and potential downsides of different types of pension.

The Self Invested Personal Pension (SIPP) gives the saver control over their investment choices and this blog will explore what investors can gain from them.

Traditionally, pensions were policies sold by and managed by large providers.

Pensions would tend to invest in funds managed by the pension company meaning that the policy holder is limited in their investment choices.

A SIPP is quite different. It is a DIY flexible pensions policy that enables the holder to invest in a wide range of choices, with the shares held in a ‘pensions wrapper’. The investments that a SIPP owner can buy have to be approved by HMRC.

Who might benefit from a SIPP policy?

Pension companies are paid for their ability (in theory)  to maximise the return on investments and minimise risk. However, there are individual investors often understand how to profit from investing already.

If you already understand investing, are happy to do your homework and work out what investment opportunities suit your needs then a self invested pension might well be a good opportunity for you.

However, as any seasoned investor knows, the value of investments can go up, but it can also go down.

Stepping out on your own can be liberating but at the end of the day any poor investment decision made by you will see your fund decline in value.

What do I do with my SIPP?

You can put a variety of different types of investments into your SIPP, so choosing a mixture of low, medium and higher risk stocks, shares and bonds (among other investments).

One of the advantages of a SIPP is the government tax relief you will receive when making an investment. If your personal rate of income tax is 20 percent, this is the rate of tax relief that will be applied to your SIPP.

Therefore, if you invest £8,000 in a SIPP, the government will assume that, without the 20 percent tax that would normally be levied on your earnings, you would have had £10,000 to invest. The government will then top your SIPP up by £2,000 to £10,000.

If you are earning a wage you can invest up to 100 percent of your wages (up to £40,000 in the 2014-2015 tax year). If you are unwaged you can contribute up to £3,600 per year and still access tax relief.

What else do I need to look out for?

In order to open one through an investment firm, you will be looking at setting up fees.

You might find that some SIPPs don’t charge an annual fee, but others will charge anything between 0.5 percent and one percent of the total value of your investments per annum.

Therefore on a £100,000 pot you could wind up spending £1,000 a year in fees.

In addition to this, you as an investor are responsible for the cost of your own trades, which might be anywhere between £10-£15 a time.

Before you commit yourself to any investment you should talk through your needs and priorities with a professional financial advisor who is an expert in the field.



When Did You Last Check Your Credit Rating?

Tuesday, March 31st, 2015

When Did You Last Check Your Credit Rating?Whether or not you realize it, Experian, Equifax and Callcredit all have a huge impact on everyday life in the UK. They are the “big 3” credit-rating companies. . Businesses use their services for a whole variety of reasons. For example some companies use them to confirm a person’s identity, particularly if they deal in age-restricted goods such as alcohol. Mobile phone networks also tend to check with credit-reference agencies before they hand out expensive contract smartphones. Some employers check them, particularly if a job involves dealing with money. This means that even if you have no intention of applying for any credit in future (not even a mortgage), it can still be a good idea to keep your credit record looking good.

Credit records are about more than just money

When thinking about brushing up your credit record, your first thoughts may be about how to manage the family finance (better) as this does indeed have an impact on your credit rating. For example late payments or being over limit on credit card will set your score back. At the same time, even those with a perfect financial track record and plenty of savings to draw on, can find themselves with poor credit scores for a number of reasons. Whatever you do, make absolutely sure you are on the electoral role as this is a major point during credit scoring.

Wrong data

Everybody makes mistakes and that holds true of credit-scoring companies. Ideally you should make a point of checking your credit record every year or so, to give yourself the opportunity to have any mistakes corrected before you feel any need or want to apply for credit. You should certainly check your file before making any significant application for credit (e.g. a mortgage).

Mixed messages

You fill in a form to apply for something and put down that you live in flat 6F. You fill in a form to apply for something else and put down that you live in flat F6. Your letters might still get to the right address but the computers at the credit reference agency might not make the connection. Even if you’ve always filled in your details in correctly, data from hand-written forms can be entered incorrectly and even forms submitted online can go wrong occasionally. Again, you can pick up these issues by checking your file.

Lack of closure

It’s fine to keep a credit card for emergencies, but if you only have a card because you’ve never quite got round to closing it, then close it. Very simply, every credit card you have on your file will be considered a card that’s available for you to use (which technically it is). This may impact how much money other lenders are prepared to offer you.

In short…

Having a good credit record is partly about general financial health and partly about making sure that your credit record is correct.

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