November 2020 - Agile IFA

Most workers are now paying into a pension. But research shows that there is a worrying lack of understanding about how pensions work and why they’re a good option for saving for retirement.

According to Royal London, seven in ten people admit they have little or no knowledge about pensions. Understanding your pension while you contribute can help you get the most out of it and ensure that you understand what it means for your retirement. If you’re unsure about why pensions are used to save for retirement and what happens to your contributions, here are the basics you need to know.

Your pension contributions are invested

The research highlighted that many workers paying into a pension don’t understand what happens to their money.

The money you contribute to a pension is invested. This means the value of your pension can fluctuate depending on investment performance. As you may be paying into a pension for decades, investing aims to help your contributions grow over the long term. As you aren’t making withdrawals from your pension, the returns delivered are invested themselves. This means you benefit from compound growth and your pension can grow even further.

Despite this, just 24% of those with a pension see themselves as an investor. This goes some way to explaining why pension savers aren’t engaging with their investments. Half admitted they have never looked at where their pension is invested. Nearly one in ten (9%) didn’t realise this information was available and 27% didn’t know they could change how their pension was invested.

If you haven’t made any changes, your pension will usually be invested in a default fund. However, pension schemes will offer a variety of funds to choose from. So, it’s worth reviewing these and seeing if alternatives are better suited to your retirement goals. If you’d like some help assessing your pension investments, please get in touch.

Your employer will make pension contributions

If you’ve been automatically enrolled in a Workplace Pension, your employer must also make contributions on your behalf. This applies to most workers.

The minimum they must contribute is 3% of your pensionable earnings. It can boost your pension and make your retirement more comfortable. However, if you stop making pension contributions, your employer no longer has to contribute either. As a result, you’d effectively lose ‘free money’.

You should review your employee benefits and talk to your employer too. Some employers will increase their contributions in line with yours or offer a salary sacrifice scheme that can provide a tax-efficient way to save more for retirement.

You also benefit from tax relief

The tax relief you receive when saving into a pension means it’s a tax-efficient way to save for retirement.

Assuming you stay within the limits of the Annual Allowance, you’ll receive some of the money you’d have paid in tax on your earnings back to add to your pension. It’s a valuable relief that can boost your pension investments. You receive tax relief at the highest rate of Income Tax you pay.

If you’re a basic-rate taxpayer and want to add £100 from your salary to your pension, it would only cost you £80 thanks to the tax relief. For higher- and additional-rate taxpayers, it’s even more valuable as they’d only need to add £60 and £55 respectively.

Again, if you stopped making contributions, you’d lose this ‘free money’ being added to your pension.

It’s tax-efficient when accessing your pension too

Retirement may still feel like a long way off, but how you’ll access the money you’re saving for this stage of your life is important too. A pension is an efficient way to save for your later years.

First, when you reach pension age, you can take a tax-free lump sum of 25% from your pension. It’s a step that can help you reach retirement goals. You can also choose to spread this tax-saving across withdrawals. At the moment, you can access your pension from the age of 55 but this will rise to 57 in 2028.

While an income taken from your pension may be liable for Income Tax, you don’t usually pay tax on investment returns. The favourable tax treatment of pensions means your pension investments can grow faster.

If you’re worried about Inheritance Tax, saving into a pension could also reduce the eventual bill. Please get in touch with us to discuss further how you can minimise Inheritance Tax.

What does your pension mean for your retirement?

Just as important as understanding how your pension works is knowing what kind of retirement lifestyle it will afford you. Understanding how your pension contributions will add up can help you prepare for retirement and means you’re in a position to make changes if needed. Please contact us to arrange a meeting to go through your pensions and retirement plans.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

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 the 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.

The Financial Conduct Authority does not regulate estate and tax planning.

Global stock markets continued to be affected by Covid-19, but there was good news mixed among the negative.

While the International Monetary Fund (IMF) warned the global economic recovery was ‘losing momentum’, markets rallied during the month based on the news that a vaccine was on the way. Pfizer was the first to announce a vaccine, closely followed by AstraZeneca. While it could be some time until a vaccine allows us to return to normal, it’s a light at the end of the tunnel.

UK

Throughout much of November, the UK was in a second lockdown, fuelling fears of a double-dip recession.

In line with these concerns, the Covid-19 furlough scheme was extended until March 2021 to protect jobs and businesses.

The Chancellor also delivered his Spending Review, which sets out plans for the 2021/22 tax year. The statistics painted a gloomy picture. The government is now borrowing at its highest level in peacetime history and the economy is predicted to shrink by 11.3% this year. The new year isn’t expected to bring relief either. Unemployment levels are forecast to reach a peak of 7.5% in the second quarter of 2021 and the economic output isn’t expected to reach pre-crisis levels until the end of the year.

Unsurprisingly, shares in UK travel companies, pub chains, retailers and hotel operators all fell sharply with the news of a second lockdown. Among those affected were:

Wetherspoons (-7%)
Whitbread, owner of Premier Inn (-3.7%)
JD Sports (-5.8%)
IAG, parent company of British Airways (-6.3%)

A survey conducted by the Office for National Statistics also highlighted the challenges businesses are facing. One in seven companies (14%) fear they will not last until next spring. This sentiment was particularly high among hospitality firms.

Not all firms have been negatively impacted by lockdown through. Some, such as supermarkets, takeaway delivery firms and DIY retailers, saw stocks rise.

The Bank of England has also commented on another risk to businesses – Brexit. The central bank warned that disruption caused by firms being unready for the transition period with the EU coming to an end will shave 1% off growth in the first quarter of 2021.

Europe

Looking to the EU, it is again a mixed bag of good and bad news.

Eurozone GDP increased by 12.6% in the third quarter. However, investment bank Goldman Sachs predicts economic growth will be negatively affected by the new restrictions across Europe. As a result, the bank expects the European economy to shrink again in the final quarter of 2020 and warned this is a trend that could continue into 2021.

Technology companies have largely been resilient during the Covid-19 volatility but that doesn’t mean they’re ‘safe’. In November, the EU hit Amazon with anti-trust charges over merchant data. Following an investigation by the European Commission, Amazon has been charged with distorting competition in the online retail sector. A second investigation is also pending. The firm faces a potential fine as high as 10% of its global turnover, about £15 billion.

US

The big news from the US in November was, of course, the presidential election. Uncertainty over who had won and whether legal action would be taken led to volatility in the markets in the days following the vote. However, the markets did enjoy a Biden bounce as it became clear that Joe Biden will be the 46^th President of the United States.

While the US still battles to control Covid-19, headline figures suggest the economy is recovering at a stronger pace than expected. According to the Institute of Supply Management, US manufacturing grew at its fastest pace in almost two years in October. Output was 59.3, compared to the 55.8 forecast on a scale where a reading above 50 signals growth.

This was also reflected in the unemployment rate dropping to 6.9%, down from 7.9% in September.

Asia

In Asia, there were also positive signs of recovery, but fears remain. Japan was the latest country to exit a recession after posting 5% growth in the third quarter. However, concerns that the country now faces a third wave of Covid-19 dampened the news.

Moving away from Covid news, the largest technology firms in China saw the value of their shares fall sharply this month. Beijing’s market regulator took its first major step in tackling the monopolistic power of tech giants. E-commerce firm Alibaba was one of those affected, with shares falling 9%.

Keep up to date with market and financial news by keeping an eye on our blog. Please get in touch if you have any questions about your investments or financial plan.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment 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.

The start of a new year is the perfect time to get your finances in order.

A few simple changes could improve your finances in 2021 and beyond, setting you up for a healthier financial future.

So, whether your finances are in a muddle or you just want to ‘do better’, here are five new year’s resolutions worth sticking to.

1. Create a spending budget

If your bank balance has been getting worryingly low, it’s probably time to take a thorough look at your spending habits.

Creating a budget is a useful exercise whatever stage you’re at in life. And you may be surprised at how easily you’re able to save extra money each month.

The following simple steps can help you create a successful budget:

Work out how much money you take home each month
Add up your monthly outgoings
Calculate the difference

If your expenses are greater than your income, check if there’s anything you could cut back on. We’re not suggesting you scrap all of your little luxuries. However, there may be lots of things you’re spending money on that you don’t actually need, such as unused magazine subscriptions or gym memberships.

If your income is higher than your outgoings, consider adopting the ’50-30-20’ budgeting philosophy. This is where essential expenses comprise half your budget, other expenses make up 30%, and the remaining 20% goes towards savings or paying off debt.

2. Pay off expensive debt

If you’ve racked up a lot of debt, the new year could be a great time to start tackling it.

The higher the interest rate, the more the debt will cost you, so it’s usually a good idea to pay off expensive debts first. These could include credit card and store card debts, unauthorised overdrafts, and payday loans.

Paying off your debts could enable you to save more money for your future, improve your credit score, and reduce any anxieties you’re feeling about your finances.

Some loans come with high early repayment penalties, so make sure you read the terms and conditions before paying them off.

3. Increase your pension contributions

If you’ve got extra money sitting around or recently received a pay rise, it could be worth increasing your pension contributions.

Each time you pay into a pension the government tops it up with 20% tax relief, making it a great way to save for your future.

The chart below shows how quickly monthly pension contributions can add up over time. It shows two £20,000 pensions growing by 5% a year over 30 years. One has £100 paid into it each month, and the other has £300.

Source: Bestinvest

It’s never too late to start preparing for your future. However, the earlier you start investing, the better your chances are of living the retirement you desire.

Research by Which? suggests couples need £27,000 a year to live a comfortable retirement, or £42,000 a year to live a luxury retirement that includes a holiday every year and a new car every five years.

Couples would need a pension pot of around £215,450 to produce enough income for a comfortable retirement via income drawdown, or £298,000 through a joint-life annuity. For a luxury retirement, these figures rise to £502,775 and £695,000, respectively.

4. Invest in a Stocks and Shares ISA

Investing in a Stocks and Shares ISA has several benefits. Your money grows free of Income Tax and Capital Gains Tax, and you can withdraw money whenever you like without paying tax.

This makes ISAs a useful vehicle for holding money that you might need to withdraw before retirement. Money inside a pension can’t be accessed until you’re at least 55-years-old, rising to 57 in 2028.

Additionally, because ISA withdrawals are tax-free, they can be a tax-efficient way of taking income in retirement. With a pension, you can withdraw up to 25% tax-free and the rest is taxed at your marginal Income Tax rate.

You can pay up to £20,000 into ISAs in the 2020/21 tax year. Keep in mind that when investing, your capital is at risk. You should invest with a minimum five-year timeframe in mind.

5. Make a will

Making a will is an essential financial exercise, yet research by Royal London suggests 57% of UK adults don’t have a will in place.

If you die without a will, it could cause immense stress and financial hardship for your family. In a worst-case scenario, your loved ones could inherit nothing and become embroiled in bitter disputes.

By making a will, you can ensure:

Your money and assets end up in the right hands
Your children are cared for by people you know and trust
Your unmarried partner and stepchildren are provided for
Your family can continue living in their home
Your estate doesn’t attract unnecessary Inheritance Tax

Writing a will can give you the peace of mind that your loved ones will be protected long after you’ve gone.

Get in touch

If you want advice on getting your finances in order, we can help. From helping you create a financial plan to organising your pensions and other assets, we’ll ensure your new year is off to a flying start. Please contact us to arrange a meeting.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

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 the 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.

The Financial Conduct Authority does not regulate will writing or estate and tax planning.