Business Matters – Issue 10

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Retirement planning

Retirement Ready?

Self-employed pension planning

Pension Plans

Delay accessing your pension

Your Pension Options

Setting up a trust

Trust the Timing

Investment emotions after retiring

Heart Over Head?

Retirement-ready? The importance of having a plan

Many of us are keen to look ahead to brighter times following an unsettled 15 months, making goal-setting all the more pertinent. And, if you’re looking to the future, it’s important to make your retirement plan top of your ‘to do’ list, as recent government figures have shown.

Everybody deserves to have the best retirement possible, and while each person’s pension savings and goals will be different, planning for the future begins with understanding what you have saved and whether you’re getting the best from it.

It can be all too easy to put off making decisions about the future – but, as recent government figures have shown, planning for your retirement has never been so important!

Living the life you want

In March, the DWP published it’s ‘Pensioners’ Incomes Series: financial year 2019 to 2020’, which examines pension income over time and also looks at pensioner demographics.

One key finding was that the average weekly income after housing costs for pensioners in financial year 2020 was £331, compared with £319 a decade earlier – more than double 1995’s average weekly income of £168, suggesting pension incomes have remained flat over the past decade.1

Another point of concern was for single pensioners, who had an average income of £231 per week – less than half of that of pensioner couples (£482 per week) – as shown below.2

Pensioner couples are also less reliant on benefit income than single pensioners, as shown below.3

Life expectancy is on the rise

It’s clear that retirement has changed, as has the journey we take to get there. When today’s pensioners started out on their working lives, it seemed a far-fetched concept that their retirement could last up to a decade or even more. So too was the thought of taking responsibility for their own pension savings.

Both of those things have changed. Those aged 65 now can expect to live for another 20 (men) or 22 (women) years, on average, according to the Office for National Statistics (ONS).4 With life expectancy continuing to rise, those working now will typically need their savings to last a long time. They will also need to take a more active role in building up those savings than previous generations had to.

Indeed, the DWP’s report shows that younger pensioners had higher incomes than older pensioners, perhaps reflecting that they knew they had a longer retirement period to prepare for.

Minding the gap

Women face a number of challenges when it comes to building up a comfortable retirement pot, with the gender pay gap and the pensions gap – and not to mention any time taken away from work to look after family – all having an impact. The DWP’s report confirmed this, showing a clear gender imbalance, with single male pensioners earning £22 more per week than single female pensioners.5

It’s also important to remember that these figures were captured before the pandemic, which has disproportionately impacted women. A recent WealthiHer survey found 62% of women’s financial plans have been affected by the pandemic, compared with 38% of men’s.6 With this in mind, it’s advisable for women to start regularly adding to their pension as soon as possible.

Getting a handle on pensions relief

As well as endeavouring to save more, another way of building up a retirement pot is by making the most of the available tax allowances and reliefs. According to a recent survey from Royal London, many people are missing out on the benefits of pensions tax relief because they don’t understand how it works.7 Of those surveyed, only 15% fully understood how tax relief on pension contributions works, and 27% disclosed that they have never even heard of tax relief.8

Pension contributions, freedoms and withdrawals are renowned for being complex, but the research showed that once people make sense of how relief works, they viewed pensions in a more positive light and wanted to increase their contributions over time.9 And that’s where an experienced adviser can help…

The importance of advice

The DWP’s figures paint a picture of the challenges we face in having to make pension savings last for as long as we need them to. It’s important to consider your best options for saving for retirement, define what you need and work out how you’re going to achieve it. But you don’t have to do this alone. A financial adviser can help you to work towards that magic number!

They’ll work with you to review your current pensions and investments to make sure your strategy is still right for you – after all, the assumptions you made when you first took out your pension may not be the same today, or your portfolio of underlying investments may have changed in nature.

What’s more, financial advice can help you better understand tax reliefs and how they relate to your individual circumstances. It can also contextualise them within your overall retirement strategy, to help clarify how you can meet your goals and objectives.

The journey to retirement has changed, but at Wellesley, we’re with you every step of the way!

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Sources:
1,2,3,5 DWP, ‘Pensioners’ Incomes Series: financial year 2019 to 2020’, Published 25 March 2021. PI estimates are based on a sample of around 7,000 pensioners in private households in the UK, taken from the Family Resources Survey (FRS)
4 Office for National Statistics life expectancy calculator, accessed July 2021
6 WealthiHer, ‘The Changing Faces of Women’s Wealth’ report, January 2021, total number surveyed 2239
7,8,9 Opinium survey on behalf of Royal London, survey of 2,000 UK adults, June 2021

Pension plans: Are the self-employed left to their own devices?

Running your own business has a number of perks, but it has its downsides too – and, having no employer to set up or contribute to your pension is one such drawback. Don’t lose sight of the importance of saving for your future – read on to find out all you need to know.

In a year that tested everyone’s resolve, the announcement in June 2020 that an unparalleled number of people were paying into workplace pensions was certainly positive news.1 This was a continuation of an upswing that started in 2012 with the launch of automatic enrolment, bringing millions of first-timers into the pensions system.

However, one key and fast-growing contingent of people was not included in auto-enrolment – namely, the self-employed.

The number of self-employed workers has expanded over the last two decades, increasing from 3.4 million (12.9% of the workforce) in 1998 to 4.8 million (15.1%) in 2017.2 Within the same timeframe, the Institute for Fiscal Studies reports that the proportion of self-employed people contributing towards a private pension has, however, dropped from 48% to just 16%.2

Bridge the gap

This essentially means that the UK is having to tackle a widening pensions gap, with the self-employed lagging behind as regards saving for retirement. This is based on factors such as their exclusion from auto-enrolment and the income insecurity that can be a feature of self-employment.

There’s a lot to think about when you’re self-employed, and the hassle factor comes into the equation too, as prioritising starting and paying into a pension can quickly slip down the rankings. Likewise, self-employed earnings can be irregular and erratic, meaning it might be difficult to calculate how much to pay in each month and year.

Tony Clark, Senior Propositions Manager at St. James’s Place Wealth Management, says:

“People will put blood, sweat and tears into getting their business off the ground, and it can be chaotic. So, it’s often hard to find the time to focus on the bigger picture when it comes to retirement finances.”

All things being equal

There’s also, perhaps, somewhat of an expectation amongst many self-employed people that their business should be their main source of retirement income. A reasonable viewpoint, yet a business should make up just part of a wider financial plan, and so it’s risky to totally depend on it.

Simon Martin, Chartered Financial Planner at St. James’s Place Wealth Management, shares his thoughts on the matter:

“Having your income and future retirement dependent upon the performance of one company can leave you exposed to societal changes, global crises and, very often, a lack of geographical, industrial and asset class diversification. If the business performance suffers, so does your present and future income.”

In a perfect world, an individual’s retirement plan should consist of a combination of pensions, ISAs, property, state pension, earnings and so on. As a self-employed worker, your business forms part of that. It can be advantageous to your business planning to have other assets to draw on too, especially if you’re nearing retirement and finding it difficult to extract value from the business.

“When you come to retire or take value from your business you may have difficulties selling or passing the business on. That’s where plans can come unstuck if you’re not diversified,” Clark warns. “Keeping a mix of other assets gives you a safety net, more time and more flexibility.”

Mutual advantage

Furthermore, tax benefits can be had through diversifying – for example, when you take money out of a business, it’s probable that there will be an element of Inheritance Tax (IHT) or Capital Gains Tax (CGT) liability. On the other hand, pensions stay outside your estate for IHT purposes, making them more tax-efficient than a business in view of passing on wealth to your family.

“The 2015 pension freedoms increased the scope of pension death benefits and have made them an effective IHT planning tool,” says Martin. “A personal pension is generally free from IHT and can be passed to a dependent or nominated beneficiary, subject to scheme rules, in a very tax-efficient manner.”

The tax advantages of pensions can be beneficial when it comes to boosting your contributions too, particularly if you know your earnings can markedly fluctuate from year to year.

There’s an annual allowance that limits how much you can pay into a pension each year; however there is flexibility within that. This is because of carry-forward rules, which entitle you to use any unused allowance from the previous three tax years to maximise your pension contributions in the current tax year.

“This means you can contribute to your pension beyond the current tax year’s allowance,” notes Clark. “It’s a way for you to catch up, and it removes some of the worry around being able to fund your pension as fully as possible.”

Action plan

Managing your longer-term finances can feel time-consuming when you’re running your own business. That’s why it pays to ease the burden and seek support from elsewhere, such as accountants and financial advisers.

A Wellesley financial adviser can help you better understand how your earnings are playing out over the financial year and devise plans around that, including structuring your pension contributions to ensure you don’t miss out. Your adviser can also help you navigate the different stages of running your own business, while making sure it aligns with your broader financial plans.

Clark concludes by saying:

“Each stage of your business will require financial strategies, including your retirement strategy. You need a financial adviser to be on the journey with you. As you build your business, you’ll have various experts you call on – and an adviser should be part of that support network, helping you realise the outcomes you’re looking for.”

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation and reliefs from taxation can change at any time.

Tax relief is dependent on individual circumstances.

Sources

1 Department for Work and Pensions, Workplace Pension Participation and Savings Trends of Eligible Employees Official Statistics: 2009 to 2019, June 2020
2 IFS, Retirement saving of the self-employed, October 2020

Your pension options: Best to pause at the pot?

If you can afford to leave your pension pot untouched for the near future, your savings have the opportunity to potentially grow. Read on to discover the key points you should consider when looking at your options for a comfortable and ‘full’ retirement.

You have a range of options at your disposal when it comes to formulating your finances for retirement – yet one major question remains: Just how long will we live for? The answer is that there is no answer! While you’re aware of which savings, assets and sources of income you can draw on, you can’t possibly predict whether those savings will need to stretch to 20 years, 35 years or even longer.

On the other hand, we do know that life expectancy has been steadily increasing. According to the Office for National Statistics (ONS) a 55-year-old man can expect to live until he’s 84, while having a 25% chance of living to 92 years old and a one in 10 chance of reaching the age of 97.1

The same ONS data shows that women are prone to have longer lifespans than men, with today’s average 55-year-old female predicted to live to the age of 87. A quarter of those her age will live to see their 94th birthday, one in 10 will reach the age of 98 and six per cent will turn 100 – nearly double the figure for men.2

The ‘beginning’ of retirement

As expert advisers in retirement planning, we understand that retirement looks different for people now compared to previous generations. People are increasingly opting to work beyond the age of 55 – the age at which savers with defined contribution pensions become eligible to start withdrawing their pension. Also, semi-retirement is more commonplace, where people return to work part-time or maybe take time out before returning to their profession or retraining.

Approaching the age of 55 is becoming more like the ‘beginning’ of retirement, and more people are seeking help from financial advisers and asking: ‘Should I leave my pension where it is?’

Here are the key points to consider:

  • If you plan to continue working or have other sources of income – for example, property – leaving your pension invested gives it an opportunity to possibly grow. In other words, when you decide to take the tax-free lump sum that savers are entitled to (currently 25% of your total pension savings), it will be a larger amount. However, be mindful that there’s always an element of risk with any investment.
  • Furthermore, one strategy as a retiree is to live off the dividend income and interest from investments, as opposed to withdrawing the capital saved. After all, the larger your pension, the more potential income it may generate.
  • This needs to be moderated by ensuring that the investment strategy for your pension has been modified accordingly. The reason for this is that the optimal way of investing when accumulating savings is very different to the best way of investing for later life, when preserving and using your savings needs to be carefully balanced.

You can continue paying into a pension and receive tax relief until the age of 75 – bolstering your savings to ensure a comfortable and ‘full’ retirement. (Tax relief is the government top-up to your savings that’s based on your income tax band).

However, be careful not to get caught out by a little-known clause called the ‘money purchase annual allowance’ (MPAA). The rules surrounding this are quite intricate and it’s therefore crucial to seek expert advice, particularly if you haven’t properly ‘retired’ yet and plan to continue working and contributing to your pension.

For context, the MPAA is a limit on the amount that someone can keep saving into their pension while receiving tax relief – currently £4,000 for the 2020-21 tax year. This is usually triggered by withdrawing more than the authorised tax-free lump sum, which can clearly have a huge negative impact on your retirement plans.

Online retirement calculators can be a helpful tool in helping you get a sense of what you need to save and the targets you might want to reach in order to be financially comfortable. However, be aware that they can only do so much – financial advisers, on the other hand, use more sophisticated cashflow planning software that allows for what might happen to your retirement plans were there to be dips in investment markets, and what the financial implications of gradual retirement may be.

Wherever you are in the process of considering your options for retirement, we can help guide you through the process, so reach out to your Wellesley financial adviser today.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is generally dependent on individual circumstances.

Sources:

1,2 Office for National Statistics, Life expectancy calculator, dataset released on 2 December 2019

Trust the timing: Using your exit proceeds to support future generations

Selling your business for a significant sum can not only secure a comfortable retirement for you, but can also bring financial security for your whole family. Here’s why!

So, you’ve made the decision to exit your company, and are eyeing up the ways you can enjoy your hard-earned wealth (especially with the prospect of foreign travel peeping over the horizon) – what next?

Well, alongside enjoying a comfortable lifestyle, you have the opportunity to support your family by putting some of your exit proceeds into a trust for your children or grandchildren. This could be to fund their education, help them get their foot on the first rung of the property ladder, or simply help them build a nest egg for the future.

And, where simply giving them a cheque won’t guarantee the money will go where you intended, a trust gives you some element of control, helping ensure your money ends up in the right hands at the right time.

After all, it’s not just about avoiding the risk of your offspring splurging on a sports car – it’s about encouraging them to make it on their own. Trusts can also help with reducing the burden of Inheritance Tax (IHT) on your now very large estates – IHT planning as gifts can be exempt if you survive for seven years after making them.

Here are four types of trusts you may wish to consider:

1. Discretionary trusts

Discretionary trusts are the most used in financial services. They give you a lot of control – including where the trust money is invested, and how any capital or income distribution is made. The beneficiaries don’t have any rights.

You retain complete freedom to vary the beneficiary/beneficiaries, the amounts they will receive and when they will benefit. For example, you might set up the trust stating that a beneficiary has a right to an income at 30 and capital at 40, but the beneficiary might be looking to buy a property at 29. A discretionary trust allows you to change your mind and help your child when it is right and timely to do so.

You need to be aware that a gift to a discretionary trust creates a chargeable lifetime transfer at a rate of 20%. However, this will only arise if the gift into the trust exceeds the individual donor’s available nil rate band, which is currently £325,000.

2. Bare trusts

You could consider a bare trust where the trustees are the legal owners of the assets holding them for the beneficiary. But be aware that your beneficiaries can take control of these at age 18 in England and Wales or 16 in Scotland – there is nothing you can do to stop them taking it or control where it is spent. The main benefit is that a transfer into a bare trust is potentially exempt from Inheritance Tax.

3. Loan trusts

If you want to support your offspring but are not necessarily able to afford to gift assets away, you may wish to consider a loan trust. Essentially, you lend the trust money, and it’s operated and controlled just like a discretionary trust – but, unlike a discretionary fund, you can get the original amount of money back. However, you’re not entitled to access any growth that has come from investing that £100,000. The main advantage of a loan trust is that it provides more flexibility.

4. Discounted gift trusts

A discounted gift trust allows you to make a substantial gift, retain an income but also have a discount on the amount of money you appear to be giving away.* You have to capitalise the value of the income stream to work out the overall loss to your estate. The main problem with this trust is that your income is fixed at the outset and you can never change it, although you can turn the income off.

Entrepreneurial advantage

Entrepreneurs can also use their business to create financially beneficial trusts. Your business qualifies for Business Relief and is not subject to IHT, but as soon as the enterprise is sold it is no longer exempt. For example, if you are approaching the sale of your business, you could transfer some of the shares into a discretionary trust. You’d be transferring an exempt asset, so you could put £1 million into the trust rather than the £325,000 limit.

Involve your loved ones

When deciding which trust route to go down, it’s important to carefully consider your options and also involve all of your children and grandchildren in the process, in order to mitigate the risk of family disputes. Discussing what the trust means for them from the outset – particularly if it’s part of the wishes left in a Will – can help relatives understand your intentions.

Decisions, decisions

To summarise, exiting a business is a major milestone that can leave you with (hopefully) substantial proceeds. If you want to gift some of this hard-earned wealth to your children or grandchildren, but would still like some control, a trust is a sensible option.

To determine which form is best suited, it’s prudent to seek professional advice. The most suitable trust depends on a range of factors, including what you’re looking for, your total value of wealth and how much flexibility you require.

At Wellesley, we can help you assess your options and plan ahead!

*Exact amount of discount will only be calculated if death occurs within 7 years.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

Trusts are not regulated by the Financial Conduct Authority.

Heart over head? Why your emotions can change around investing after retiring

Seeking financial advice in retirement can be key to your plans for later life and helping to provide enough money to meet your personal goals. But why, indeed, do so many people struggle to imagine the future and feel so emotional around this subject?

Retiring is such a personal choice – from when and how we choose to retire, and what we do when we get to that point.

It can also be hugely emotional for many people. After all, it’s essentially the start of a new chapter that can shake our sense of identity.

We may also find that our relationship with money changes at this life stage, as we’re likely to shift from an ‘accumulation’ phase (working, while building our wealth) to a ‘decumulation’ phase (not working, while spending our wealth).

What’s more, this can often lead to a different lifestyle and evolving financial circumstances, too.

Our sentiments towards money may also change.

Reason it out

It may be that, on reaching retirement, you feel like you want to splash the cash a little – after all, it might seem as if it’ll last you a long time. You choose to use your pension freedoms to enjoy a fancy holiday – only to return and feel worried about your financial situation 20 years from now, or regret your rash decision.

There is, in fact, a scientific reason for such behaviour. Research has revealed that there are two parts of the brain: one associated with emotions and the other with abstract reasoning.1

David Laibson, Professor of Economics at Harvard University, says:

“Our emotional brain has a hard time imagining the future, even though our logical brain clearly sees the future consequences of our current actions.”

Or perhaps market fluctuations unnerved you while you were investing into your pension – but you essentially felt that it was right to ride out this erratic period, as you knew you were set to invest for many more years to come.

Now that you’re retired, market shifts may concern you all the more, triggering different worries – for example, your wish to leave a legacy or having to modify your lifestyle to avoid running out of money.

When you retire, your investments become more exposed to market changes, especially if they’re used to provide benefits or income. In this case, sequencing risk (the risk that the timing of your withdrawal is disadvantageous, thus reducing your investment’s likelihood of supporting future withdrawals) can have significant repercussions.

There are specific risks that accompany investing in retirement, which highlights how crucial it is to take the ‘right’ level of risk to align with your personal goals and circumstances.

These risks are also accompanied by a set of emotions. Naturally, financial advice can’t make them disappear, yet it can help you find the necessary support to come to the right decisions for you and your retirement – all the more so if you suspect it might be a case of ‘heart over head’.

Life expectancy is on the rise and, as such, our retirement income will need to cover as much as 20, 30 or even 40 years of retirement. Once you have a plan in place that can be regularly reviewed, this will help you reduce the risk of outliving your investments, plus you can achieve an income to allow you to enjoy this unique stage of your life.

A Wellesley financial adviser will be able to help you navigate the retirement process, explain the potential risks and formulate a personalised plan that accounts for your personal goals. They are also well placed to help you understand those emotions that you may have about the future – and give you peace of mind for the years ahead as a result.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.

Sources:

1 Study: Brain battles itself over short-term rewards, long-term goals, Princeton University, 2004