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Clarke Nicklin Financial Planning

'protecting your wealth and helping your investments grow'

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July 2016

Are you fit to retire?

Getting your pension in shape to enjoy the kind of lifestyle you want in later life

‘Will I be able to afford the retirement lifestyle I want?’ is a question that many people ask but struggle to figure out. There are many ways to assess your likely income in retirement and work out how much you need to put away now to enjoy the kind of lifestyle you want in later life.

We know that we want an active, comfortable retirement but often don’t know where to start the savings and investment process. The starting point is to obtain professional financial advice and set a plan in motion that is reviewed at least annually to enable you to build the future retirement you want.

Key considerations for most people

Everybody’s circumstances are different, but the key considerations for most people when they think about retiring will come down to factors such as whether they’re renting, paying a mortgage, have any debt, plan to keep working, and how much money they have saved in pensions and other investments. People estimate that living reasonably comfortably in retirement requires around 50% to 60%* of the income they had while they were working.

Your life changes when you retire – and so does the way you spend your money. The increases in the cost of living with inflation are another important consideration. While the State Pension increases with inflation (with the ‘triple lock’, increases can exceed inflation), income from your pension might not, depending on how you decide to take your money.

Start saving for your pension early

If you start saving for your pension early in your working life, it may be difficult to predict what your needs will be when you retire. Ideally, you should aim to put away as much as you can afford, but don’t worry if it’s not as much as you’d like to start with. It can be better to save small amounts that have a long time to grow in value. As your income improves, you may be able to increase how much you put away for your pension.

If you’ve started to save later in your working life, you may have a better idea of what your circumstances are likely to be, which can make it easier to work out what level of income you’ll need for your retirement. However, you’ll have less time to save it up and the amount of money you’ll need to save may be higher.

Achieving financial freedom

Saving for retirement is essential if you want the financial freedom to enjoy your later years. Things to consider include:

  1. Deciding how much money you want each year in retirement
  2. Calculating how big your pension pot needs to be to give you that income
  3. Working out how much you should be saving today in order to build that kind of pension pot value

Government research indicates that people earning around £50,000 or more per year look to achieve a retirement income that is 50% of their current salary. If that doesn’t sound like much, remember you’re perhaps unlikely to have a mortgage and other big expenses at this stage in your life so you may need a lot less than you do when you’re working. The ratio tends to go up for those on lower salaries, as you’d expect.

Know your number

Next, you want to work out how big your pension pot needs to be in order to achieve the retirement income you want. One rule of thumb is to take the annual retirement income you’d like – let’s say it’s around £50,000 based on the above – and then multiply that by 20. So in this example, to achieve a retirement income of £50,000, you’d need to build up a pension pot worth in the region of £1,000,000.

Your annual allowance

You can receive tax relief on pension contributions worth up to the lower of 100% of your annual salary or the annual allowance. The standard annual allowance is currently set at £40,000 for the current 2016/2017 tax year (higher earners or those who have flexibly accessed their pensions may have a lower figure). If the contributions to all your pensions (including all personal and workplace contributions) are more than the annual allowance, you may have to pay a tax charge on anything over the annual allowance based on the highest rate of Income Tax.

Need to boost your future retirement income?

Everyone’s retirement needs are different, and planning for your retirement is just like any other kind of budgeting you have to do: it requires calculating some numbers, implementing a plan and continually reviewing it until you reach your goal.

*Scottish Widows, October 2014

A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.

 

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You don’t have to be wealthy for your estate to be liable for Inheritance Tax

Protecting your estate is ultimately about securing more of your wealth for your loved ones and planning for what will happen after your death to make the lives of your loved ones much easier.

You don’t have to be wealthy for your estate to be liable for IHT and it isn’t something that is paid only on death, it may also have to be paid on gifts made during someone’s lifetime. Your estate will be liable if it is valued over the current IHT threshold on your death. The IHT threshold, or Nil Rate Band (NRB), is fixed until 2020/21 at £325,000.

Your estate includes any gifts you may have made within seven years of your death. Anything under the IHT threshold is not taxed (the ‘Nil Rate Band’) and everything above it is taxed, currently at 40%. Where a person dies and leaves at least 10% of their net estate to a qualifying charity a reduced rate of 36% IHT can be payable.

Additional Nil Rate Band

From 6 April 2017 the Government will be introducing an Additional Nil Rate Band (ANRB). This will start at £100,000 and increase by £25,000 each tax year until it reaches £175,000 in 2020/21, when it will increase each tax year by the Consumer Price Index (CPI).

The ANRB will be available where you pass your house to your children, grandchildren or great grandchildren. It will also be available if you downsize or cease to own a home as long as the replacement is passed to your children, grandchildren or great grandchildren. It will start to reduce if your net estate is more than £2 million and will reduce by £1 forever £2 it is over.

Making gifts

If you can afford to make gifts during your lifetime this will also reduce the value of your estate, and so your ultimate IHT liability. You can make a gift of up to £3,000 a year without any IHT liability, and if you don’t use this whole allowance it can be carried forward to the next tax year.

Life insurance policy

Taking out a life insurance policy written under an appropriate trust could be used towards paying any IHT liability. Under normal circumstances, the payout from a life insurance policy will form part of your legal estate, and may therefore be subject to IHT. By writing a life-insurance policy in an appropriate trust, the proceeds from the policy can be paid directly to the beneficiaries rather than to your legal estate, and will therefore not be taken into account when IHT is calculated.

Setting up a trust

The structures into which you can transfer your assets can have lasting consequences for you and your family and it is crucial that you choose the right ones. The right structures can protect assets and give your family lasting benefits. A trust can be used to reduce how much IHT your estate will have to pay on your death. There are two types of trust to choose from, a Discretionary Trust and Bare Trust

It is a legal arrangement where the ownership of someone’s assets (such as property, shares or cash) is transferred to someone else (usually a small group of people or a trust company) to manage and benefit a third person (or group of people). An appropriate trust can be used to reduce how much IHT your estate will have to pay on your death.

Make a Will

By making a Will you are detailing what you want to happen to your assets after you die. A Will also nominates someone to be in charge of carrying out your wishes. If you die without making a Will the government could keep everything if a suitable heir is not found. The rules of intestacy (dying without making a valid Will) can be very complicated and only your spouse or registered civil partner is assured of any inheritance. 

The sooner you start planning, the more you can do

Whether you want to provide for the next generation or leave a charitable legacy when you die, or simply want to minimise an IHT bill, whatever your priorities are, the sooner you start thinking about this the more you can do.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE WILL WRITING, INHERITANCE TAX PLANNING OR TAXATION ADVICE.

Splashing the cash – New ‘you only live once’ (YOLO) generation gambling with their financial future

The prospect of saving for tomorrow may feel too distant for some, but to achieve long-term goals (including financial security in retirement) we all need to consider reprioritising our needs to give ourselves a better financial future. But, more than four in ten Britons in their 30s and 40s are stopping any future saving in favour of spending their cash, according to Scottish Widows’ tenth annual Savings Study.

Younger counterparts more switched on

As the overall number of people saving has risen – up nine percentage points in the last five years to almost four in ten – those aged 35–49 are lagging behind in the savings stakes as their younger counterparts become more switched on to the need to save for the future.

Faced with the prospect of never owning a house, record low interest rates and the reality of working beyond state retirement age, Britons aged 35–49 are adopting the ‘You Only Live Once’ (YOLO) mentality usually associated with their younger counterparts (18–34 year olds), more than a third of whom are actively saving for the short and long term.

New ‘YOLO’ generation not currently saving

The research found almost a third of the new ‘YOLO’ generation are not currently saving anything at all, compared with less than a quarter of 18–34 year olds. More than a third of 35–49-year-olds admit they didn’t save a penny in the last 12 months, versus 32% of 18–34-year-olds.

While a number of the new ‘YOLO’ generation appear to be carefree, not saving could also be borne out of necessity rather than choice for many. Half say they simply cannot afford to save for the long term, and those living in rented accommodation (24%) also face higher-than-average rent costs, forking out £495 a month (above the UK average of £475).

Despite a welcome overall improvement in the number of people saving, the research rings alarm bells when it comes to the difference in attitudes displayed by different generations. The emergence of a ‘spend now, save later, if at all’ attitude among this generation – usually assumed to be more financially secure than its younger counterparts – shows there is work to be done to increase engagement with savings and ultimately plug this gap.

Source data:

The tenth edition of the annual Scottish Widows Savings Study is based on a survey carried out online by YouGov who interviewed a total of 5,161 adults between 28 January and 4 February 2016.

 

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