Why cash isn’t always king when it comes to retirement
Pensioners are over-investing in cash when withdrawing funds from their pensions, which can affect their living standards in retirement.
Solely or predominantly investing savings in cash can be detrimental as cash has historically generated much lower returns that other asset classes. Lower returns mean savers will likely have smaller pension pots to live on.
Research from the Financial Conduct Authority (FCA) has found that consumers could increase their annual income by over a third if they invested in a mix of assets, rather than just cash, over a 20-year period.
Obtaining the right advice when withdrawing, or thinking of withdrawing, from pensions is therefore key. The FCA has revealed that 33% of savers who do not take advice end up investing all of the funds they withdraw into cash or ‘cash-like’ assets.
A significant contributor to this over-investment in cash is that pension providers don’t offer savers an ‘active’ choice of what to do with their funds when they withdraw and instead default funds straight into cash. Many savers remain unaware this has even happened.
In response, the FCA has launched a consultation to address this over-investment. It proposes introducing the following measures:
- Ensuring savers make the ‘active’ choice of investing in cash, rather than doing so by default
- Providing warnings to savers about investing mostly in cash or cash-like investments
- Contacting savers if they remain invested mainly in cash for a year
Read more from Salisbury House Wealth in the The Times:
Transfers from Defined Benefit to Defined Contribution schemes become increasingly popular – doubling in a year
The value of transfers from Defined Benefit schemes to Defined Contribution pension schemes has more than doubled in a year. Data we obtained from the FCA shows that the value of pension transfers increased to £20.8bn in 2017, up from just £7.9bn in 2016.
The rise in transfers has largely been driven by the incentives on offer from employers. Many employers are keen to cap their spiralling pension liabilities and, as a result, are offering employees and other pension fund members six-figure sums to transfer benefits into private pension schemes.
Incentives on offer from employers include cash payments on top of the transfer value or a rise in the transfer value of the benefits on the condition that those benefits are transferred.
Additionally, some savers may be drawn to the fact that the value of Defined Contribution pensions can be passed on to financial dependents at death, including spouses and children. Whilst Defined Benefit schemes only allow you to transfer benefits to your spouse.
The rise in transfers also partly reflects the growing number of savers looking to use 2015 reforms to access their company pensions and reinvest it elsewhere. The reforms, known as ‘pension freedoms’, individuals over the age of 55 can draw a regular income, withdraw lump sums or make ad hoc withdrawals from their private pensions whenever they want.
As a result of the increased flexibility, individuals can now withdraw funds to invest in shares, bonds and even property. This flexibility allows individuals to potentially increase the value of their savings long before they actually retire.
Statistics from HMRC show that a record 222,000 people withdrew funds from their Defined Contribution schemes in the first three months of 2018, the highest number since pension freedoms were introduced.
However, savers need to be careful and the decision to transfer funds from final-salary pension schemes should not be taken lightly. There is concern that savers are accessing their pensions for the wrong reasons and are not getting the right advice.
Many final-salary schemes represent substantial pots of wealth and it’s crucial the right decision is made because transferring is a one-way ticket and there is no way back.
Read more from Salisbury House Wealth in the Financial Times:
Careful planning to help you avoid HMRC’s pensions ‘supertax’?
Careful planning could help savers avoid HMRC’s costly pensions ‘supertax’. The amount collected through the 55% tax charge has increased 24% in the last year alone to £41m, up from £33m in 2015/16.
The tax is levied on savers who breach the maximum amount of money that can be saved into a pension pot, which is known as the Lifetime Allowance (LTA). Savers pay a tax charge on the amount that exceeds the LTA limit; if this amount is taken as a lump sum the tax charge is 55% and if the amount is taken as income the charge is 25%.
As well as the £41m collected from the 55% tax charge, HMRC collected an additional £73m from savers from the 25% charge last year.
As a result of these punitive tax charges, savers need to be very careful before drawing lump sums from their pension. To do this, savers could closely monitor their pension pot levels, which includes keeping track of the performance of investments as well as any contributions made.
As many savers will already know, it’s no longer just the super-rich that are falling foul of this tax – average earners are at just as much at risk. This is particularly true following the steady decline in the LTA over the last few years.
The LTA was reduced from £1.5m to £1.25m in 2014/15 and for the 2018/19 tax year, the LTA will be £1.03m.
To reduce the chance of getting charged, savers could also look at alternative saving options such as ISAs which would allow them to continue to make investments without being caught out.
Read more from Salisbury House Wealth on this topic in The Times:
More women using ISAs but the wealth gap isn’t closing
Recent data that Salisbury House Wealth has studied shows a growing number of women are investing through ISAs, but the wealth gap in the value of savings between men and women is widening. We think that might be due to what women and men are picking for their ISAs.
According to the latest figures from HMRC, the number of women investing through ISAs has increased by 272,000 in the last year alone to 11.3, up from 11.1m in 2014/15. In fact, there are now more women with ISAs than men, at just 10.8m.
However, despite more women investing through ISAs, the gender gap in the average market value of savings is actually widening. In 2015/16, the gender gap was 11%, up from 9% in 2013/14.
A key reason for the growing gender gap may be that many women are investing in what you could argue are the ‘wrong’ type of ISA. The data shows that last year, 82% of women invested in a cash-only ISA compared to just 75% of men.
Investment in cash-only ISAs is less likely to generate the higher long-term returns needed to close the wealth gap on men than stocks & shares ISAs. With interest rates on cash ISAs at historic lows, savers with cash ISAs risk seeing the value of their savings reduce rather than rise, due to inflation.
As a result, although cash ISAs may be seen as the ‘safer’ option, it may not be the best for growth. This raises the question as to whether some women should consider a less cautious approach when investing to increase the possibility for real growth over the longer term.
Maximising savings is particularly important for women because statistically they have a longer life expectancy and can therefore expect to rely on their savings for longer than the average man.
Overall, it’s great to see a growing number of women investing through ISAs but moving forward, it’s important the right steps are taken to start closing the wealth gap. Read more from Salisbury House Wealth in FT Adviser and Moneywise:
The Gender Pay Gap is a Pensions Problem Too
With the news out last week that large companies in the UK have a 9.7% gender pay gap, there was even more startling news from HMRC in relation to pension income. Data from HMRC shows that women only received 37% of all pension income in 2015/16, down 2% since 2012/13.
In total men received £79.3bn in pension income compared to women who earned just £46.5bn.
Given that pensions are a vital tool in providing a financially secure retirement, investing in pensions needs to be encouraged.
Typically women have found themselves leaving their careers to start a family, meaning they have made less in pension contributions over their lifetime.
But it is just as important for women to invest in pensions as it is for men, as they are still one of the most tax efficient ways of saving and investing available.
However even if you are on a career break and still not paying tax, you can make pension contributions of up to £3,600 per year and receive tax relief on those payments.
Starting a pension when you are young can set you up for retirement and provide you with the financial security you want when you stop working.
If you are unsure about the right pension option for you, speak to Salisbury House Wealth who can help set you on the right path to reaching your retirement goals.
Read more from Salisbury House Wealth in The Times and the Guardian:
Salisbury House Wealth – Daily Telegraph
Personal pension pots are becoming an increasingly important tool for passing on wealth from one generation to the next.
The amount of money inherited by the relatives of pensioners that die under the age of 55 rose by a third (33%) last year to as much as £2.1bn, up from £1.6bn in the previous 12 months.
Pensions have become a useful way to pass savings onto relatives IHT-free and have become an important part of inheritance planning.
The increase comes following reforms introduced in 2015 which allow for pension pots to be passed onto the next generation largely tax-free. Under the new rules, if the pension holder dies before the age of 75, a beneficiary can inherit some or all of the fund as a tax-free lump sum – up to the Lifetime Allowance of £1.25m.
Read more on this topic from Salisbury House Wealth in the Daily Telegraph:
Salisbury House Wealth – Sunday Express
The amount savers withdrew from their pensions pots through ‘income draw downs’ increased 14% to £15.3bn in 2016/17, up from £13.5bn in 2015/16.
The amount withdrawn has increased 173% over the last five years, up from £5.6bn in 2012/13.
Income draw downs enable savers to draw a regular taxable income from their pension pot. Many savers are increasingly drawing incomes, ad hoc withdrawals and lump sums from their pension early, before reaching retirement age.
Read more on this topic from Salisbury House Wealth in the Sunday Express:
Savers withdrew £15.3bn from their pensions pots last year – up 14% from £13.5bn in 2015/16.
The amount withdrawn has now increased 173% in the last five years, up from just £5.6bn in 2012/13, as a growing number of savers take advantage of rule changes to take control over their pensions.
These new pension freedoms have opened the door to the increased use of Self-Invested Personal Pensions (SIPPs), a government approved scheme. A hybrid SIPP offers savers the flexibility to manage their investments and purchase property with their funds.
Savers are now better able to diversify their investments and gain exposure to other asset classes and risk profiles. However, it is important anyone drawing from their pension spends the money wisely and makes informed decisions.
Read more from Salisbury House Wealth on the topic in the Financial Times:
The number of people earning over £250,000 has increased by 36% in the last five years – to 137,300 up from 100,700 in 2010/11*.
15% of these individuals (21,200) are under the age of 40. Rising total pay in the UK’s financial services and technology sectors is likely to be behind the trend.
This growing affluence, however, has a sting in its tail. New pension rules introduced in 2016 limit annual pension contributions for those earning £210,000 or more to just £10,000. So these high earners are finding the options to make highly tax efficient pensions savings much more limited.
Chancellor Philip Hammond could again target high earners in his upcoming Budget by further reducing pension-related tax benefits for the wealthy.
As pension savings opportunities for high earners become increasingly limited, it is important that they explore the other long-term savings options available to them.
This can help ensure that individuals that during their career have been relatively high earners have enough money to continue to support their lifestyles in retirement.
Read more from Salisbury House Wealth on this topic in The Daily Telegraph:
*Latest figures available are 2014/15
Savers are turning away from cash as an investment – new figures out today show that cash ISAs saw a 33% drop in amounts invested in the last year.
Investments in cash ISAs fell to £39.2bn in 2016/17, down from £58.7bn in 2015/16. The numbers subscribing to cash ISAs fell by 16% over the same period.
The fall is partly due to the low interest rates offered on cash ISAs which are now negative real interest rates – ultimately leaving savers in danger of their investments devaluing over time.
Savers are cottoning on to the fact that cash ISAs simply do not offer the investment value they need to achieve their long-term financial goals…
Read more from Salisbury House Wealth in The Independent and Money Expert:
High earning women are starting to gain ground on men, as the number earning £1million or more has doubled in the last five years to 1,400 in the most recent tax year up from 700 in 2010/11.
According to Salisbury House Wealth, women now make up 9.2% of £1million-plus earners, compared to just 7% five years ago.
The increase comes as diversity at the top rises up the corporate agenda and entrepreneurship amongst women has increased. There are now 1.6million self-employed women in the UK compared to 1.2million in 2011.
However, Salisbury House Wealth says that the recent furore over the BBC’s disclosure of its top earners’ pay, which revealed that many female stars are being paid far less than men, highlights that there is still much progress to be made on equal pay.
Read more in the Financial Times today:
Salisbury House Wealth research has revealed that there has been an 80% increase in tax levied by HMRC on savers who breached the Lifetime Allowance last year.
The amount collected by HMRC increased to £36m in 2015/16, up from £20m in 2014/15.
The Lifetime Allowance (LTA) represents the maximum amount of money that a saver can save in their pension pot before incurring an additional tax charge of up to 55%. The LTA was reduced to £1m in April 2016.
Salisbury House Wealth says that savers can avoid being charged for exceeding their LTA by closely monitoring their pension pot levels. This includes keeping track of investment performance – as well as contributions.
From the age of 55, savers can also start withdrawing from their pension pot early through the drawdown facility – but this alone is unlikely to solve the issue and needs its own consideration.
Salisbury House Wealth research has found that pension liabilities held by SMEs jumped 7.5% in 2016 – to £4.3bn.
The figures highlight how SMEs are struggling to fund their pension obligations.
They also highlight the risk that employees of SMEs face should their employer become insolvent. If this happens, employees’ retirement income could fall very short of expectations.
It is advisable that employees have in place a back-up plan – such as a personal pension – just in case.
Read more in the latest edition of the Mail on Sunday:
The number of young-people earning more than £250k has increased 60% over the last year – Salisbury House Wealth explores the driving factors behind this trend in the Financial Times
The pro’s and cons of taking a defined benefit / final salary pension transfer is reviewed a little here
More women than men are investing in ISA’s and more are choosing to invest in stocks and share ISA’s as discussed in this article
Woman are at the sharp end of the pensions crisis, as new figures show that men have almost three times the amount of retirement savings.
Workers in their 50’s see biggest rise in £250k earners
Always worth reviewing the funds you hold in case you are being overcharged for under performing funds. Actively managed funds operate differently to passive funds and require more attention.
Pension contributions jumped by almost a 1/5th last year but the concern is that the self-employed are contributing up to 50% less. Some of the reasons are explored in this article
The number of under 30’s earning above £1m per year has jumped over a 1/3rd from 2015 – 2016 and some of the details are mentioned in these articles
Research compiled by financial advisory service Salisbury House Wealth found that some 400 under 30s have now reached the huge milestone, this is up from 300 in 2015.
The banks are still getting away with paying as little as 0.05% in interest on savings, new regulations are trying to improve the detail people receive so this trend ceases.