FCA Rules Delayed
From global events to your own family holiday, the COVID-19 pandemic has pushed back many of our plans; and the Financial Conduct Authority’s plans (FCA) have not been exempted.
In June 2018, the FCA published a consultation paper which examined the impact that the 2015 Pensions Freedom overhaul had made on people’s retirement income. In this publication, one area that was marked as concerning was a growing trend of people shirking financial advice and simply accessing their pension through drawdown themselves.
In summary, the areas that FCA found most alarming factors were:
- Individuals who were solely focused on taking their tax-free cash and paid little or no attention to the investment of the remaining funds to be used for drawdown.
- A third of those accessing their pensions without guidance didn’t know where their money was invested, and the remaining two-thirds only had a general idea.
- Some pension providers were defaulting non-advised clients into low-risk assets (such as cash) at drawdown, without explaining how this may impact growth or the longevity of the pension pot.
The FCA stated that they “strongly suggest that a significant number of non-advised consumers are likely to hold their funds in investments that will not meet their objectives for how they want to use that money in retirement”.
The suggested solution to this problem was to enforce rules that meant pension providers had to provide “investment pathways” for drawdown funds, based on the client’s objectives and needs. The regulator also proposed that there would be specific warnings issued if the investments held were more than 50% in cash.
Personally, we really see the value in the FCA’s proposals (and of course advocate clients taking advice with their retirement options). The proposals were due to be put into force in August 2020, but the implementation date has been pushed to February 2021. With cash returns virtually zero, the delay could be costly for many pension investors.
If you are unclear about how your pension is performing, how it’s invested, or whether it’s on track to provide you with the retirement income you need, we are more than happy to help. Please get in touch and one of our expert Financial Planners will be able to conduct an independent review to see if you have the most suitable strategy in place.
Pension Myths Debunked
When it comes to saving for our futures, pensions are often the first port of call on our financial checklists, but do you understand them? With so many complex and confusing rules, it’s no surprise that many people don’t know their Lifetime Allowance or understand the tax-reliefs available to them, but this is made even more complicated and ever-changing rules and regulations.
So, what’s a myth and what can you rely on?
Myth 1: You Will Be Able to Retire on Your State Pension
The new state pension pays £175.20 per week, or £9,110.40 per annum. And that’s if you even qualify for the full amount! Your working history dictates how much of the State Pension you will be eligible to receive, so some individuals could end up with an even smaller sum.
Unless you live an incredibly modest and sheltered lifestyle, this small sum is unlikely to give you sufficient security in the future, especially if you have high hopes of enjoying your time in retirement.
Myth 2: Annuities Are Extinct
The introduction of ‘Pension Freedom’ in 2015 brought with it greater flexibility and options for pension holders. Prior to this time, annuities were seen as the only way to take your pension, but with greater opportunities now available, annuities have become increasingly unpopular due to their rather restrictive natures.
However, annuities are certainly not extinct. In some cases they are still a viable and useful option for pension savers, especially due to the guaranteed income for life that they offer.
Myth 3: You Can Take 25% of Your Pension as Tax Free Cash
One of the defining features of the pensions freedom movement was the ability to take up to 25% of your pension pot as a tax-free lump sum. However, what many overlooked was that some older-style pension schemes can provide an even larger percentage of protected cash to draw upon. Many people in occupational schemes, for example, are not even aware of their options or how much of their pot they can take without being penalised by tax.
It is always worth enquiring about your pension’s benefits, rather than assuming they are the same as other schemes. Please contact us if you would like one of Financial Planners to help clarify your situation and ensure you don’t lose valuable benefits.
Myth 4: You Can’t Exceed Your Lifetime Allowance
Currently, the Lifetime Allowance is set at £1,073,100 for the 2020/21 tax year, but strictly speaking it is not the absolute maximum limit. The truth is that you can save more than this into your pension, but be warned- you may face a tax charge.
The amount of tax will depend on how you draw the money, but can amount to 55% on the excess funds if you take it as a lump sum. However, if this money is held to age 75, or drawn as an income, the surcharge can be as low as 25%. Like pensions, any planning around tax can be complicated, and getting it wrong can cost you more than you intended. If you need guidance, please get in touch and one of our Financial Planners will be able to guide you through the best strategy.
Myth 5: You Can’t Take Your Pension Before You’re 65, Without Being Penalised
Technically this statement isn’t a myth, however the penalty faced by taking your pension early could be worth it.
The type of pension you have will determine if taking your pension early could beneficial. As an example, if you take benefits early from Final Salary Scheme, there may be a reduction in available income, but you would be receipt of your pension for a longer period of time. Ultimately, this could reduce your tax bracket, or take you below the Lifetime Allowance threshold.
As a general rule, we would recommend that clients who need an earlier retirement income utilise their other investments first (for example, their ISA), but drawing from your pension early can be a viable strategy.
Myth 6: Default Lifestyle Funds with Protect My Income
Default funds certainly have a place, but will often lead to lower rates of return. Traditionally, as you near retirement, pension funds will be moved into ‘less risky’ asset classes (such as cash or bonds), in order to preserve your capital and reduce volatility, which is fine if you want the same amount year-on-year in retirement.
However, if your retirement spending is likely to fluctuate, or if you want flexibility over your pension drawings, it may be prudent to deploy a strategy that encourages more long-term growth. Your lifestyle and goals will determine how much income you are likely to need, and when you will need it, so it is crucial that your pension is invested in funds that will support your aims.
At Efficient Portfolio we utilise Lifetime Cash-Flow Forecasting to help plot out your future expenditure needs. Using a tool like this will help to determine how your pension savings should be invested, so it’s a valuable part of your overall financial planning.
Myth 7: My Pension Dies with Me
With some pensions, such as a Final Salary Scheme, you will only be able to leave a percentage of your pension to your spouse or dependent, and the rest of the pot is effectively lost. However, most personal pensions give you the ability to leave your residual pension to any nominated beneficiary, meaning that you can ensure your children, grandchildren, or any other loved one can benefit from your legacy.
If you die before age 75, pension benefits can usually be passed on tax-free. However, it is important to consider that your remaining pension can form part of your estate, so may be subject to Inheritance Tax.
Myth 8: Your Workplace Pension Will Provide Everything You Need for the Future
Auto-enrolment is undoubtedly a positive step forward and has encouraged more and more people to save for their futures. However, unless you pay in a significant amount each month, your company pension scheme is unlikely to provide a fertile nest-egg for the future.
Simply contributing your minimum amount will give you some funds for the future, but it is important to seek guidance on what your expected retirement income could look like. If it’s lacking, it may be worth considering how you can bridge the gap and ensure that you have a comfortable retirement.
Stamp Duty Land Tax (SDLT)
The Stamp Duty Holiday, which came into effect in July 2020, has already proved to be a great stimulus in what has been a declining property market. In the first half of this year (2021) we have already seen the tax threshold increase to £500,000 for both home movers and First Time Buyers, which is a shift from £125,000 and £300,000, respectively.
As a result, the market felt a significant shift and very quickly transactions became the strongest that they had been in over a decade. Sales increased by 10% in the year previous and to date, and approximately 600,000 buyers have benefitted from the SDLT holiday.
However, it wasn’t all good news. In these unprecedented times and with a thriving and unexpected market, the SDLT holiday has resulted in mounting pressure on Conveyancers, Lenders, Surveyors and Advisers. Transaction periods increased from an average of 14 weeks to an average of 22 weeks.
With such increased demand and the end of the SDLT holiday fast approaching; 31st March 2021, the Government are now under increased pressure to offer an extension to the holiday, which will ensure that with the approximate 120,000 – 160,000 transactions in progress, buyers will still be eligible and not end up facing unexpected tax bills.
The Guild of Property Professionals recently revealed that should an extension not be announced, 31% of buyers are likely to cancel their purchase due to Stamp Duty become payable.
The announcement is expected in the Spring budget on 3rd March 2021 as to whether such an extension will be applied and where the cut offline must be. Rumours circulating indicate that there is consideration that there will be an announcement to offer a six-week extension to those transactions already going through.
As soon as more details come to light, we will let you know how any extensions could impact your mortgage planning.
What is the Reflation Trade?
If you have been following the financial press recently then you might have come across something called the ‘reflation trade’, but what does this mean?
Essentially, this is the expansion in the early part of a business, but in this context, it’s being used in a wider economic sense. Having gone through the economic uncertainty of the past year, there is now talk about a widespread expansion in the global economy. This is based on a few factors:
- Vaccine Rollout
- Pent up demand for consumer spending
- Unprecedented levels of government stimulus
In terms of the USA, with the democrats in power, the country has already seen bond yields pushed higher and prices of bonds lowered. There is a feeling that further stimulus will follow.
The expectation is here that more stimulus, not just in the US, but here in the UK, will result in higher inflation going forward. This could make it quite a tough time for bonds, which have been on a 40 odd year bull run.
Bonds at current rates would suffer more if inflation were to creep up higher moving forward; this would hurt bond prices as the real returns will be less, or even negative. However, high inflation would help erode the levels of debt that governments are currently taking on in real terms.
Whilst we don’t think this is reason for alarm, or a call to sell out entirely of bonds, it might be worth revisiting your risk profile and having a discussion with your Financial Planner, so we can look to position your portfolio accordingly, depending on the time frame of your investment. With the majority of our clients investing for the long term, and particularly for their retirement, holding equities might provide a better chance of hedging against inflation, albeit at the cost of some increased volatility in the short term.
Changes to your portfolio will depend heavily on your personal circumstances, tolerance to risk and your individual goals, so it is worth seeking guidance before making any changes. Please get in touch with us if you’d like to book in for a call with your Financial Planner on 01572 898060 or email [email protected].
Charlie’s Mini Blog
At the start of 2021, it felt like there was renewed enthusiasm and then, almost as quickly as it came, it was taken from us on 4th January.
During Lockdown Part 1, we were getting inventive, having Zoom quizzes and embracing a novel approach to life; this time around, it felt like people’s energy had waned and they’d swapped the creativity for binge watching Netflix. Combined with the bad weather and the dark nights, it was all getting too much, and the general wellbeing of people was in decline. Then suddenly, the weather gets better, Boris gives us a path out of lockdown and optimism has started to return.
This is like investing money. There are darker times, and when they come it is easier to do what feels easy and safe, like sell your investments, instead of what’s difficult, like investing more. It is, however, the most important time to do the right thing. I’ve taken to reading more, learning the guitar and taking a course called ‘The Artists Way’ to ensure I have the right mindset through the dark times, and this has stood me in good stead through this lockdown. When we emerge, I’ll be a better person for it.
If we can take the time and energy to improve our finances and take some brave steps in the scary times, when the shoots of recovery appear (and they always do) then you can be positioned perfectly to benefit. So, invest time in yourself, and invest time if improving your finances, and when we are allowed to party, you’ll be in the perfect place to maximise the enjoyment!
The Body: A Guide for Occupants by Bill Bryson is as good a way of understanding how we work as any book I’ve read. Bryson, as ever, gives colour to what could easily be a dry subject, whilst educating you about your most valuable asset. As the Sunday Times said, “So packed with arresting facts (you eat 60 tons of food in a lifetime) and unlikely anecdotes (such as Isambard Kingdom Brunel's six weeks with a half-sovereign lodged in his throat) that you barely notice the sheer volume of anatomical knowledge you're digesting... makes complex subjects simple and eminently entertaining.” A must-read book from our Life Library.