Minding the savings gap: how can high earning women still build sizeable investment portfolios?
The Gender Pay Gap and its resulting savings amongst high earning men and women appears to be getting even worse not better.
Research we completed recently shows just 15% of those earning £250,000 or more last year were women, marginally worse than 16% the year before. Just 23,000 women compared to 130,200 men earned £250,000 or more last year. This widening gap has implications for the ability of women to save for retirement – clearly this ‘savings gap’ needs to addressed alongside the pay gap.
So how can women bridge this savings gap and still build sizeable investment portfolios?
Even if the pay gap were to close rapidly many women experience disjointed careers, as they are primary care giver in a family, and this can result in ‘missing years’ of earnings. Given that some women may be out of work for several years – and may not return on the same salary they left on – these missing years where less is saved can add up quite quickly.
The key for higher earning women is to work out how best to allocate their earnings whilst they are working in order to make up the savings gap with men before they reach retirement.
For some this may be too late as the pension income gender gap for those at retirement age is significant. Men drew a total of £96.6bn from their pensions last year, up from £95.7bn in 2015/16, whilst women drew £52.2bn, the same as in 2015/16. This gap stems from the fact that women tend to have much less in their pensions to start with.
Unfortunately, some financial advisers and other industry professionals perhaps misunderstand the risk appetite of women and recommend lower risk, lower return investment products as a result. This perception that women have a lower risk appetite reinforces the already entrenched savings gap as women get a reduced exposure to higher returning investments.
This bias towards marketing lower risk, lower return investment products to women is perhaps most obvious when looking at the gender split of those holding cash ISA accounts – amongst the lowest risk, lowest return product available. Women own 52%, or £110.4bn, of cash ISAs, an increase from 51% in 2012. In comparison, men own 48% or £101.4bn, down from 49% in 2012*. That bias is even more clear when you consider that the gender pay gap means women have far less money to invest in ISAs in the first place.
Cash in ISAs simply will not generate the inflation-beating returns needed – and certainly will not bridge the savings gap.
To help address this gap, the simplest step women could take is to invest more in assets that offer higher-risk adjusted returns, such as equities. A simple comparison makes it clear why: the best interest rates on cash ISAs are currently around 1.1% whilst the FTSE100 has returned 11% over the last five years alone.
Suddenly switching all your savings from cash to equities may not be the right way forward in terms of perceived risks but gradually allocating more to higher-returning assets could make a big difference later in life.
For the highest earning women, who can afford to lock cash away for longer periods, there are a range of tax-efficient savings options available that can also play a role in a portfolio. For example, Venture Capital Trusts which give access to fast growing UK businesses.
Aside from what to invest in, another way for women to maximize the performance of savings is to ensure they are fully aware of the tax charges that apply to them and do not get unnecessarily caught out. Obviously, paying extra tax can be very damaging to savings.
For us, the best thing for women to do looking ahead is to work out their investment objectives – where do you want to be and when? Working out your risk appetite and saving towards set goals will go a long way to closing the savings gap.
**Interactive Investor 2019
This article appeared in Money Observer on July 24 2019
Changes to punitive tax on pensions should be top priority for the new Government
The new Prime Minister has promised to look at the problem caused by doctors being hit by a punitive tax when their pensions contributions breach the “Lifetime Allowance” (LTA). However, we think Boris Johnson’s pledge to fix problems with the LTA should cover all UK savers and not just NHS doctors.
The LTA limits how much you can save into your pension whilst still receiving tax benefits. If you breach the LTA you will face charges on the amount that exceeds this limit once you start to draw down your pension. If this amount is taken as a lump sum the charge is an eye-watering 55%. Even if the amount is taken as income, the charge is still 25% Both of these charges are clearly very substantial.
HMRC collected £102m from savers who exceeding their LTA in 2016/17 alone - up 55% on the £66m the year before. Over the last ten years HMRC has collected £330m from this LTA tax.
Reforming the LTA should be on the priority list for the new Chancellor as it penalises individuals who are trying to save for retirement.
This pension limit isn’t just affecting the super-rich either, it has hurt people on more modest incomes too. A lot of individuals in middle England have faced charges for breaching the LTA. When the Government started reducing the LTA, perhaps they did not realise what problems they were going to cause.
The LTA was reduced from £1.5m to £1.25m in 2014/15 and then cut even further to just £1m in 2016/17. For the 2019/20 tax year, the LTA is £1.055m.
Speak to us for help building your pension pot without triggering extra tax charges.
Read more in Pensions Age:
Gender pay gap amongst high earners gets worse not better – what does this mean for the savings gap?
The gender pay gap for those earning £250,000 or more has got even worse in the last year not better. As this gap widens the question arises as to what women can do to close the corresponding savings gap that also exists.
Our research shows that just 15% of those earning £250,000 last year were women, marginally worse than 16% the year before. Just 23,000 women compared to 130,200 men earned £250,000 or more last year.
So what can women do to ensure they still build sizeable savings pots for the future? The key for higher earning women is to work out how best to allocate their earnings whilst they are working to make up for the gap in earnings with men. For example, leaving cash in savings accounts will not generate the inflation-beating returns that are needed to build up a nest egg or fund a retirement. Instead, women, especially those who are a long way from retirement, could use their earnings to invest in assets that offer higher risk-adjusted returns, such as equities.
Women could also consider what element of their capital they invest in tax-efficient investment schemes, such as Venture Capital Trusts and the Enterprise Investment Scheme. These schemes tend to invest in fast growing early stage companies.
Ultimately, building a diversified investment portfolio is the key.
When saving, it is also important that high earners do not get caught out by extra tax charges. One to be aware of is the tapered Annual Allowance caps which caps tax-free pension contributions at £10,000 per year for those earning £210,000.
Speak to us to find out more about building a portfolio that meets your investment objectives.
FCA warns that Generation X are leaving their pension savings too late
The FCA has warned that Generation X is leaving saving for their pensions far too late. Research by Salisbury House Wealth suggests that the FCA is probably right with this warning.
Our research shows that Generation X has lagged so far behind on their pension savings earlier in their lives that they are now pouring cash into their pension to make up for lost time. They account for 43% of all UK pensions contributions made in the last year.
The value of contributions by Generation X increased 14% to £3.7bn last year alone, up from £3.2bn the previous year. Total UK personal pensions savings last year totalled £8.5bn.
The FCA points out that many people in Generation X are feeling the pressure of their incomes being squeezed from both younger and older dependents. The result is that saving for pensions do not become a priority until late on.
It is important to remember that the earlier you start saving for your pension, the more time you give your investment to grow through compounding. Saving from an early age gives access to the benefits of long-term returns by creating the option to reinvest any gains over a longer period.
Whilst it is good news that members of Generation X are adding to their pensions, the FCA paper suggests more can be done. Speak to Salisbury House Wealth for professional advice to build you pension pot.
Read more in The Daily Express, Money Marketing and Accountancy Daily:
Are employees taking enough responsibility for their retirement?
Are employees taking enough responsibility for their retirement or are they too reliant on contributions from their employers?
Our research reveals that contributions from employers into defined contribution pension schemes increased by a substantial 75% last year to £8.4bn. Meanwhile, employee contributions increased by just 1.6% over the same period to £6.4bn.
Although employer contributions are helpful, it is crucial individuals add to their retirement savings alongside.
This increase in contributions from employers is largely driven by the roll out of auto-enrollment rather than a bout of employer generosity. Workplace pensions have been a vital tool in helping employees save for retirement but this generosity is likely to have its limits.
The small increase in contributions from employees suggests that many are not taking retirement savings seriously enough. Contributing to a pension pot as often as possible, even if only in small amounts, is key to ensuring good spending power in retirement.
By taking responsibility for your retirement savings you put yourself in the best possible position for your golden years. Fortunately, there are a number of options available to individuals - speak to Salisbury House Wealth to find out more.
Generation X showing it’s never too late to build up your private pension pot
Generation X are proving it’s never too late to build up your private pension pot – people aged 43-54 contributed the highest amount to their pensions of any other age group in the UK.
Our recent study shows Generation X contributed £3.7 billion to their pension pots in 2015-16, which represented nearly half of all personal pension contributions in the UK. Millennial’s and Baby Boomers, contributed 19% and 37% respectively.
The high amount contributed by Generation X may be the result of savers accelerating their contributions in order to make up for under investment in their pensions earlier in life.
It is certainly easier to contribute more in your forties and fifties as this is when most people are at their peak earning potential, leaving them with more disposable income.
However, despite Generation X leading the way, many people in this bracket have still not saved enough. A separate study we conducted shows that individuals aged between 43-54 need to have saved £187,400 on average by 2019 in order to retire comfortably but on average have only saved £70,400 so far. More still to be done then.
It is best to get a head start on saving for retirement as this unlocks the benefits of long term returns. Making regular contributions to your pension, getting exposure to financial markets and reinvesting any gains over time can you take a long way to ensuring a comfortable retirement.
Generation X needs to have already saved £187,400 by today in order to retire comfortably
Yet 43-54 year-olds have only saved 37% of this amount so far
Highlights the importance of starting to save into a pension pot early in life.
Millennial’s in their 20s and 30s need to have saved £73,500
New research from Salisbury House Wealth, the leading financial adviser, shows that individuals in Generation X, those aged 43-54, need to have already saved £187,400 on average by today in order to retire comfortably.
However, ONS data shows that individuals in Generation X have only saved 37% of what they need to have saved so far, with the average private pension wealth of this age group at roughly £70,400*.
Salisbury House Wealth says that very few people will have saved the required amount by 2019 with many other costs often coming before saving into pension. The research shows that individuals aged 43 need to have already saved £146,950 whilst individuals aged 54 need to have saved £227,780.
Generation X: Individuals aged 43-54 need to have saved £187,400 by today on average – those individuals aged 54 need to have saved £227,780
Salisbury House Wealth’s research is based on the assumption that an annual income of £19,000 is needed for even a relatively basic retirement, as suggested by Which?, the consumer lobby group.
An income of £19,000 would only cover one long-haul holiday each year, a new car every five years and general living costs. This level of comfort would be considered essential by many retirees, and many will want an even higher income.
However, in London and the South East where living costs are highest, individuals may find an income of £19,000 does not meet even this basic level of comfort.
Salisbury House Wealth says the research highlights the importance of saving into a pension early in order to benefit from the effects of long term returns. An individual is unlikely to reach the desired level of savings without having exposure to financial markets and reinvesting their gains.
The research also shows that millennial’s, which is defined as those individuals aged 24-42, need to have saved £73,500 on average by today in order to retire comfortably.
Although many people, especially amongst millennial’s, may not be looking to save into a private pension at the moment, any contribution is helpful in the long term. This is especially true as the state pension age continues to increase.
Tim Holmes, Managing Director at Salisbury House Wealth, says: “There is a big gap between what individuals need to have saved into their pension pot by this point and what is actually the case.”
“When you start saving is just as important as how much you save each year.”
“In order to have saved enough by your mid-fifties, you need to start saving early. Incrementally building a private pension pot and investing with sensible long term outlook will take you a long way to having the buffer you need when you finally reach retirement age.”
“Millennial’s have time on their side and can benefit for longer from the effects of compound returns, which is an incredibly powerful tool.”
“It can be difficult to adopt the long term outlook required when saving but the question that needs to be asked is whether you want to just survive in retirement or actually enjoy it.”
Is cash really the safest option in choppy market conditions?
By Tim Holmes, Managing Director at Salisbury House Wealth
New research reveals a quarter of high net worth investors are keeping more than 50% of their assets in cash as they believe that it is the least risky option in current market conditions.
However, is cash really problem free as it sounds?
Many savers are concerned about volatility in the stock markets which has been triggered by quantitative tightening in both Europe and the US. Uncertainty over the outcome of Brexit has further exacerbated fears over the performance of UK assets.
The retreat to cash appears to be widespread amongst investors. A third of investors with £100,000 or more of invest-able assets are also now keeping 26% of their savings in cash.
However, cash comes with its own drawbacks.
As interest rates on both savings accounts and cash ISAs remain at chronically low levels, far below inflation, many savers will be eroding the value of their savings by holding them in cash.
Research by the FCA shows that cash consistently under performs all other asset classes in the long term. The research suggests that savers would benefit more from investing in mix of asset classes rather than being overweight in cash or cash-like assets.
After all, investing is a long term game and having exposure to financial markets over a long period of time is really the only way to access inflation beating returns. Ensuring you have a well-balanced investment portfolio across different assets and regions can offset any shorter term volatility.
Number of pensioners in work increased by 64,000 last year – have you saved enough to retire?
By Tim Holmes, Managing Director of Salisbury House Wealth
More and more people aged 65 and over are having to re-join the workforce as growing life expectancy and higher retirement ages stretch pension savings, forcing people to work longer.
Currently 1.2m pensioners are working, an increase of 64,000 over the last year alone. Data from the ONS shows that the proportion of those aged 65 and over who work has almost doubled to 10.4% over the last ten years.
A core factor driving the growing number of working pensioners is longer life expectancy in the UK, which will have risen from 78.3 years for men and 82.3 for women in 2010 to 82.5 and 85.3 respectively by 2030.
Longer lives mean pension savings have to go further and many people are finding that they have not saved enough over the course of their life to retire aged 65 and live for another ten or more years. Staying in work or going back to work becomes the only option.
Growing life expectancy has also led to the official retirement age rising as the state system comes under pressure and many don’t have enough saved to retire before the state pension age.
To deal with pressure on the state system, the Government is even actively encouraging employers to hire more older people. Its Fuller Working Lives strategy was launched last year and calls on UK employers to take on a further 1m workers aged 50-69 during the next five years.
Ultimately, as life expectancy continues to grow, so does the importance of building a decent pension pot as you don’t know how long it will need to last. The earlier you start saving, the more your savings will benefit from the effects of compound interest, and the earlier you may be able to retire.
8% rise in amount of cash withdrawn from pensions in the last 12 months
The amount of money being withdrawn from pensions by people over the age of 55 has increased by 8% in the last year, the latest stats from HMRC have revealed.
In 2017/18 £7.1bn was withdrawn in flexible pension payments, an increase from £6.6bn in the previous year. The amount of money withdrawn in Q2 of 2018 was £2.3bn, a record high for any quarter since pension freedoms were introduced in 2015.
The pension freedoms introduced in 2015 removed rules for individuals requiring pension savings to be spent on annuities, an insurance contract which provides an annual income for life. They also allow for individuals over 55 to access their defined contribution pension savings when they want it.
The latest statistics show that more and more people are taking advantage of the new rules, with people drawing down on their pensions earlier. That could be quite a significant issue for some savers.
People withdrawing money from their pensions should be aware that once you have started drawing down from your pension pot, you will be limited to just £4,000 a year in future pension contributions.
Many people withdrawing from their pension pots will see it as an opportunity to diversify their investment portfolio, and increase their retirement income. However, some will spend it quickly, which risks leaving them with little income when they do retire.
Pensioners and investors need to make sure they are making the right financial decisions that will enable them to live the comfortable retirement that they envisaged. As more and more people worry about how they will afford retirement, getting advice on how far your money can go is a must.
Speak to Salisbury House Wealth to help make the right financial decisions which enable you to head towards retirement with fewer financial worries.
Amount of money raised by UK businesses through EIS falls for the first time since 2010/11
The amount of money invested into UK businesses through the Enterprise Investment Scheme (EIS), one of the more tax efficient ways for people to invest in early-stage growth companies, has fallen for the first time since 2010-11.
The Government introduced a new more restrictive criteria on what business are eligible for EIS, which has impacted the amount of money being invested through the scheme.
As a result of the Government restricting EIS use, it is more important than ever for investors to take up their full allowance of other tax efficient investment opportunities such as ISAs and pensions.
New HMRC statistics show that the number of businesses raising money through the Enterprise Investment Scheme (EIS) for the first time has fallen by 27%. Businesses using EIS for the first time raised £1.05bn in 2015-16, but this dropped to £768m in 2016-17. The overall amount of money raised has also fallen by 8% in the past year, from £1.95bn to £1.8bn.
EIS offers tax relief on investments into smaller, high-risk businesses to encourage investors to back certain SMEs. Individuals can invest up to £1m in a tax year and receive 30% tax relief on their investment. EIS has been a great way for investors to support growing businesses in a tax efficient way, whilst businesses benefit from the vital investment they need.
The Government risks turning increasing numbers of investors away from the popular scheme by imposing further restrictions on the type of companies that are eligible for EIS.
Why time in the market is more important than timing the market
By Tracy Browne, Wealth Management Consultant at Salisbury House Wealth
Emerging Markets (EM) investors are clearly rattled. According to this weekend’s FT, EM funds saw the biggest outflows in almost a year at the beginning of May as volatility has buffeted markets. Investors pulled $1.6bn from emerging markets in a week, as Argentina’s currency fell to a new record low and many other EM currencies were hit.
Are investors right to be worried? In my opinion, no. As in any market, volatility is just that – a bumpy patch over the short [to medium] term which does not necessarily signal the beginning of the end.
Just look at the FTSE100. At the start of February, it had dropped 8% since the middle of January. Today, the index has recovered to surpass January’s levels, and now it sits only a fraction below its all-time high. Indeed, after a market downturn of 57% between 2007 and 2009 after the financial crisis, the market has rebounded to 4x times its value since this low.
Of course no one ever complains about positive volatility! They tend to only start selling in earnest when the going starts getting tough. What this shows is that investors need to take a long-term view to ride out the blips and bumps in the road.
To prove my point, let’s take a 20-year time-frame. Over the last two decades, [UT UK All Companies TR in GB] Equities have gained 236%, while [UT North American TR in GB] rose 270%. Over the same period, emerging markets equities have fared even better – with [UT Global Emerging Markets TR in GB] up by 467%! What’s important here is not timing the market, but time in the market.
As well as taking a long-term view, being invested in a well-diversified portfolio with a good mix of different assets to balance out risk and drive returns is also critical. That might well mean emerging markets equities alongside FTSE stocks, bonds, property or alternative assets. Over-weighting in any one asset type is always a risky strategy.
How significant this turbulence is in emerging markets and how long it will last is hard to know, but investors with diverse portfolio spread who can afford to play the long game should have no reason to panic. When it comes to volatility, it often pays to hold your nerve.
New Tax Year = New Opportunities
The 2018/19 tax year started at the stroke of midnight between the 5th and 6th of April. While many individuals leave tax planning to the end of the tax year, you can look to maximise the benefits by using your personal tax allowances* and reliefs straight away. Please get in touch to take advantage of one or more of the following:
· The tax free personal allowance has increased to £11,850 from £11,500
· Basic rate tax of 20% will be payable on income above the tax free allowance and up to the new higher rate threshold of £46,350 (which has increased from £45,000).
· Additional rate income tax remains the same at 45% on income above £150,000
· The Junior ISA allowance has risen to £4,260 from £4,128 for children under 18.
· The adult ISA allowance of £20,000 remains unchanged.
· If you are 16 or 17 this tax year (or have children of these ages), they can benefit from both the Junior ISA allowance and adult ISA allowance (cash only).
· The Personal Savings Allowance, which gives you tax-free savings interest, remains £1,000 for basic rate tax-payers. This reduces to £500 for higher rate tax payers and additional rate tax payers do not get any allowance.
· The State Pension has increased by 3%, which for the full allowance is an increase of £4.80 a week to £164.35
· Minimum pension contributions (paid by employers and employees) through auto-enrollment have risen to 5% (2% employer and 3% employee) from 2% (1% employer and 1% employee)
· The Lifetime Allowance for pension savings has increased to £1,030,000.
· The Annual Allowance stays the same at £40,000 (though this reduces for individuals with income over £150,000 or if you have already accessed your pension savings)
· The Residence Nil Rate Band has risen to £125,000 from £100,000.
· This can be added to the £325,000 Inheritance Tax allowance when a direct descendant inherits someone’s main house.
· The annual gifting allowance remains the same at £3,000 and if you did not use it in 2017/18, this can be carried over to this tax year.
· The tax-free Dividend Allowance has reduced to £2,000 from £5,000 (although dividends received by pension funds and ISAs remain tax-free).
· There is no change to the taxation of Venture Capital Trusts, so you can invest up to £200,000 and get up to 30% income tax relief.
· Similarly, the taxation of Enterprise Investment Schemes is unchanged, meaning you can invest up to £1 million and claim up to 30% income tax relief.
Capital Gains Tax
· The Capital Gains Tax allowance has increased to £11,700 from £11,300.
· Married couples and civil partners will continue to be able to combine their annual allowances.
· Landlords will only be able to offset 50% of their mortgage interest payments against their rental income (down from 75%).
· By 2020, there will only be a 20% tax credit saving from a landlord’s mortgage interest.
*This information is based on our current understanding of the rules for the 2018-19 tax year.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
The value of investments and any income from them can go down as well as up and you may not get back the original amount invested.
ISA season – the mythical ISA millionaire is not so rare
This week saw the release of the ‘Wealth and Assets’ Survey from the Office of National Statistics that measures people’s attitudes to savings and retirement. It’s a pretty timely report as we are now entering “ISA season” when providers of Individual Savings Account (ISA) ramp up their advertising. It is also the time when many savers make one of their biggest investment decisions of the year – where they place their ISA allowance.
The Office of National Statistics research reveals that a generation of adults now doubt that cash ISAs are the best way to save for the future. Even though cash ISAs offer a tax-free savings account.
Confidence in ISAs has fallen. 7% of individuals now view them as the safest retirement strategy, down from 12% five years ago. This may be because cash ISAs now offer such low returns and why we are increasingly asking investors to see if share ISAs are right for them.
Having your money in a cash ISA while interest rates are low does little to help you save for retirement and can even mean you lose money when inflation is taken into account.
Stocks and Shares ISAs also offer tax free returns. History shows that over the long-term stock market returns has the upper hand over cash – offering better returns. UK equities have delivered an average annual return of 5% over the last hundred years compared to cash which has returned just 0.8%. * That is not too bad at all when consider that recent calculations by Fidelity International found that if you invest your entire ISA allowance every year then, at a 6% annual return, you could be an ISA millionaire within 22 years.
However, you need to be aware that, with a shares ISA, your capital at risk and, as recent events have shown, the stock market can be volatile.
Speak to us to establish exactly what shares ISA is right for you and your investment objectives.
*Barclays Equity Gilt Study 2016