Month: January 2024

High inflation has dominated headlines over the last two years. With the rate now slowly nearing the Bank of England’s (BoE) target, taking stock of what it means for your finances could be useful.

The BoE is responsible for managing inflation and aims to keep it at 2%. The central bank explains keeping inflation stable helps everyone plan for the future.

Several factors combined in 2021 that led to the rate of inflation soaring. It reached a peak of 11.1% in October 2022 – a 41-year high. In the 12 months to November 2023, it’s still above the BoE target but has fallen to 3.9%, according to Office for National Statistics data.

The BoE’s Monetary Policy Committee (MPC) said it expects inflation to continue falling towards the 2% target in 2024. However, it doesn’t expect to reach the target until the end of 2025.

Declining inflation doesn’t mean the cost of goods and services will fall

While slowing inflation could be a good thing for your long-term finances, it’s unlikely to deliver a boost to your everyday budget.

Falling inflation doesn’t mean the prices of goods and services fall, it simply means the pace at which the costs are rising is slowing down. So, it might be a good idea to review your day-to-day expenses. If your income hasn’t increased at the same rate as inflation, you could find your disposable income has fallen in real terms.

For example, let’s say your income was £3,000 a month in 2020. According to the BoE’s inflation calculator, your income would need to have increased by more than £630 a month just to maintain the same lifestyle in November 2023.

Falling interest rates could be beneficial if you’re a borrower

While the rate of inflation might not reduce the price you pay for goods and services, it could affect the cost of borrowing.

One of the main ways the BoE has sought to tackle inflation is by increasing its base interest rate. Higher interest rates can lower spending in the economy as both consumers and businesses tighten their belts.

As of December 2023, the BoE’s base interest rate is 5.25%, which compares to a rate of just 0.1% in November 2021. The MPC expects to maintain this rate through the first half of 2024 before gradually reducing it to reach 4.25% in 2026.

So, if you have a mortgage, credit card, personal loan or other form of borrowing, you might start to benefit financially from lower interest rates in 2024. For some, this could have a positive effect on their budget.

Making inflation part of your long-term goals could help keep you on track

The period of high inflation over the last two years has highlighted why it’s important to consider the rising cost of living when you’re making long-term plans.

Even when inflation meets the BoE’s target, the gradual rise of goods and services can add up.

Between 2010 and 2020, inflation averaged 2% a year. That might not seem like a lot, but over a decade it could gradually reduce your spending power if your income is static.

If you retired in 2010 and planned to take a monthly income of £2,000 from your pension for the rest of your life, you’ll start to notice your money doesn’t stretch as far relatively quickly.

Indeed, the BoE’s inflation calculator suggests your income would need to have increased to more than £2,400 by 2020 to maintain the same standard of living.

Now, imagine the effect stable inflation could have on your income needs over a retirement that might span several decades. During that time, you may also experience periods of high inflation, which could reduce your spending power even further.

It’s not just retirement planning that could be affected by inflation, but any of your long-term goals. Whether you’re setting aside money to support your children through university or to buy property in the future, inflation may affect your target and the steps you need to take.

Do you want to make inflation part of your financial plan?

Considering how outside factors, like inflation, might affect your goals could help your financial plan stay on track. Please contact us to talk about creating a long-term financial plan that could give you confidence, even when inflation is high.

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.

Pension savers dubbed “triple defaulters” could be overlooking small changes to their pension that may make their long-term finances more secure. Have you reviewed these three important pension decisions recently?

According to a survey from Aviva, millions of workers who have been auto-enrolled into a pension scheme have never updated their contributions, investment choices, or target retirement age. The findings could suggest many people are approaching retirement unprepared.

Indeed, more than half of those on a middle income due to retire in the 2050s say they have never heard of or know nothing about their retirement options. So, it’s no surprise that just 1 in 5 said they feel prepared in terms of how they will fund their retirement.

As your pension is typically invested for decades, even a small change could lead to the value of your savings at retirement being thousands of pounds more. So, you could benefit from reviewing these three pension decisions.

1. What percentage of your income is added to your pension?

If you’ve been automatically enrolled into a pension, you’ll pay the minimum contribution level. This is currently 5%, including tax relief, of your pensionable earnings.

While this might sound like a reasonable figure to put aside for your retirement, it could mean your lifestyle once you give up work falls short of your expectations.

According to the Aviva research, a person earning the median salary throughout their career who contributes the minimum amount to their pension from the age of 22, could expect a pension fund of around £225,000 when they retire in the 2050s.

This falls short of the savings a retiree is predicted to need to achieve a “moderate” lifestyle, according to the Pensions and Lifetime Savings Association.

In this scenario, if the individual puts an extra 2% of their income into their pension, its value could be £56,000 more at retirement – an increase of 25%.

Of course, many factors affect the value of your pension at retirement and performance cannot be guaranteed. However, the example demonstrates how regular contributions could add up to a substantial sum over the long term.

2. How is your pension invested?

Usually, when a pension is opened for you, your savings will be invested through a default fund. However, this might not be the best option for you, so it could be worth looking at the alternatives.

Typically, a pension provider will offer several different funds with various risk profiles. Some may also offer funds with “sustainable” objectives, which will invest in companies that meet its environmental, social, and governance (ESG) criteria. You may find that a different fund is more suitable for you once you review them.

Using the same scenario as the above example, a 22-year-old who secures higher investment returns of just 1% throughout their working life could see their pension value increase by £57,000 at retirement.

3. What is your target retirement date?

You don’t have to set a retirement date straight away, but having an idea of when you’d like to retire is also important.

If you haven’t manually set a retirement date with your pension fund, your provider will usually set it at State Pension Age. There are two key reasons why it’s important your retirement date is accurate.  

First, your pension provider will send you annual statements, which will include a projection of the value of your pension at retirement. If you decide to retire sooner, you could find your pension savings fall short.

Second, pension funds will often automatically reduce the amount of risk your investments are exposed to as you near your retirement date to limit the effect of short-term volatility. So, setting the retirement date could help you manage risk.

Just 1 in 10 middle-income pension savers retiring in the 2050s have sought professional advice

As well as overlooking important pension decisions, the survey also suggests many aren’t taking professional financial advice.

Just 1 in 10 people who receive a middle income and will retire in the 2050s have already sought professional advice. This compares to around 37% of the same group in the US.

Interestingly, 58% of Brits who have retired in the last 10 years say they wish they’d known more about pension needs when they were younger.

Even if retirement is a goal that’s still several decades away, seeking advice about how to secure your long-term finances could provide you with more freedom later in life. It could also ensure you have the information you need to make informed decisions about your pension now and understand the long-term effects they could have.

Contact us to talk about your pension

Whether retirement is just around the corner or years away, we could help you create a retirement plan that suits your lifestyle and goals. Knowing that your pension has been reviewed by a professional and having someone you can discuss your retirement with could boost your confidence in your long-term plan.

Please contact us to speak to one of our team and 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 not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. 

Retirement can be an exciting milestone, but one that you might feel nervous about too. Setting out how to achieve the retirement lifestyle you want could help put your mind at ease. One of the first things you may have to consider is how you’ll retire – would a phased retirement suit you?

Over the next few months, you can read about key considerations if you’re nearing retirement, from contemplating the emotional side of stepping away from work to how to access your pension. Read on to discover if a gradual retirement transition could be for you.

A retirement transition period could help you create a work-life balance that suits you

Not too long ago, many retirees followed the same path – they’d give up work on a set date.

Now, you have far more choices, which could enable you to strike a balance that suits you. An increasing number of people are choosing a phased retirement.

Indeed, according to the Great British Retirement Survey 2023, almost half (47%) of people aged between 55 and 65 who have reduced their working hours say it’s due to them winding down. Cutting your working hours could help you create a work-life balance that suits your needs if you’re not ready to give up work completely.

Reducing your hours isn’t the only way to transition into retirement either. You could switch to a less demanding job, work on a freelance basis, or even start your own business.

As well as allowing you to blend work and life in a way that’s right for you, there are other benefits to transitioning into retirement, such as:

• Continuing to receive an income to help your retirement savings go further
• Benefiting from the structure work may provide
• Enjoying the social aspect of being part of a team.

If a phased retirement is an option you think could suit you, there are some key decisions you might need to make.

5 useful questions to consider if you’ll transition into retirement

1. What does your ideal work-life balance look like?

Transitioning into retirement gives you the option to create a work-life balance that matches your goals.

So, it’s worth spending some time setting out what your ideal circumstances would be – would you want to remain in your current role? Do you want the freedom to set your working hours?

2. Will you need to supplement your income?

As you transition into retirement, your income may fall. If you could supplement your income from other sources, such as accessing your pension or depleting savings, factoring this into your financial plan could be useful. It’s an important step in understanding how long your assets will last and how to create long-term financial security.

You might also want to consider how your day-to-day expenses may change too. You might find some areas fall if you reduce how much you’re working, such as the cost of commuting, while other outgoings could rise.

3. Will you continue paying into a pension?

A pension may provide a tax-efficient way to save for your retirement thanks to tax relief. In addition, your employer must contribute on your behalf if you’re between 22 and the State Pension Age, and earn more than £10,000 in 2023/24.

So, even though your income may fall, it might still be worthwhile contributing to your pension when you consider the long-term benefits.

You should note that if you start to take an income from your pension, your Annual Allowance may fall. This is the amount you can tax-efficiently add to your pension each tax year.

In 2023/24, the Annual Allowance is usually £60,000. However, accessing your pension may trigger the Money Purchase Annual Allowance, which would reduce how much you can tax-efficiently contribute to your pension to £10,000.

4. Will you defer the State Pension?

The State Pension Age is 66 in 2023/24, but it is gradually rising. The government’s State Pension forecast could help you understand when you’ll be eligible for the State Pension, as well as how much you could receive.

If you’ll be transitioning into retirement after the State Pension Age, you may want to consider deferring claiming your State Pension.

For every nine weeks you delay taking it, your State Pension will increase by the equivalent of 1% – defer for a year, and the income you’d receive would rise by just under 5.8%.

As well as boosting your future income, deferring your State Pension could reduce your Income Tax liability now.

5. How will a phased retirement affect your long-term finances?

You might not be giving up work completely, but don’t put off thinking about your long-term plans. The decisions you make now could affect your financial security for the rest of your life.

As a result, creating a retirement plan could be valuable and provide peace of mind by helping you understand the long-lasting effect of decisions like:

• Accessing your pension while you phase into retirement
• Halting pension contributions sooner than you planned.

Contact us to discuss your retirement aspirations

Whether you want to give up work on a set date or ease into retirement, a tailored plan could help you reach goals and build the life you want. Please contact us to talk about your aspirations for retirement and how you might achieve them.

Next month, read our blog to find out what questions you may want to consider when setting out your retirement lifestyle.

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 not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.