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Bridging The Pension Generation Gap

Urgency for younger generations to access improved financial education

The chasm between generations regarding retirement prospects is glaringly apparent, as 78% of individuals believe their predecessors had more favourable pension plans or brighter retirement futures. According to recent research, this data highlights a stark revelation that underscores the urgency for younger generations to access improved financial education[1].

It’s Good To Talk

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How to navigate financial conversations with your family

Money, a subject often seen as taboo within family conversations, is surprisingly more entwined in your family’s affairs than you might think. Engaging in frank discussions about financial matters can create opportunities for strategic financial planning, potentially enhancing your family’s financial future. The sooner these discussions begin, the better the chances of safeguarding your legacy and strengthening your children’s fiscal stability. Let’s delve into some potential discussion points.

The Power Of Prevention

An effective financial plan acts as your protective shield

In the realm of financial well-being, an old adage rings particularly true: ‘Prevention is better than cure.’ An effective financial plan acts as your protective shield, specially designed to weather any economic storm that may come your way. It offers comfort and control, ensuring that you are steering the ship of your finances, not vice versa.

Heightened Interest Rates Increase Demand For Annuities

What will you do with your hard-earned pension pot at retirement?

As we navigate life’s journey, retirement presents both a dream and a challenge. It’s the stage where we finally enjoy the fruits of our labour, a time for relaxation, exploration, and personal growth. But the question that often looms is how can we ensure a steady income stream that keeps pace with our aspirations and maintains our lifestyle? Enter the world of annuities.

Annuities in recent years have often been overlooked in the retirement planning conversation. But current heightened interest rates have increased demand for annuities, offering unparalleled peace of mind, knowing that your basic needs will be covered, irrespective of how the financial markets perform.

Securing the best possible deal

They offer a steady, guaranteed income throughout your retirement years or for a specific period. But given the irreversible nature of purchasing an annuity, it’s imperative to thoroughly explore your choices, select the most suitable type and secure the best possible deal.

Annuities provide a practical means of converting your accumulated pension savings into a lifelong source of income. Comparing rates across various providers is essential once you determine your required income level. This process, known as the ‘open market option’, allows you to bypass your provider’s offer and potentially secure a higher rate with another provider.

Boosting your retirement income

Shopping around could boost your retirement income by as much as 20%. To put it in perspective, simply by exploring your options, you could increase your retirement earnings by nearly £6,000. Recent analysis reveals that a 66-year-old with a £100,000 pension pot can now purchase an annuity yielding an annual income of £7,000 – an increase of £174 compared to last year[1].

The analysis highlights a striking difference between the best and worst annuities available. For a 66-year-old with a £100,000 pension pot, rates can vary by up to 3.6% – equating to a potential annual income discrepancy of £254 or £5,945 over an average retirement period[2].

Making the right choice

Securing the right annuity for your needs can seem daunting, given the variety of options available. This one-time, typically irreversible decision is vital, and understanding the different types of annuities can greatly facilitate the process.

When choosing an annuity, you can select a conventional level-income annuity, which ensures consistent payments throughout your life. Alternatively, an increasing annuity starts with a lower initial income, but your payments increase annually in line with inflation or a predetermined rate, such as 3% or 5%. It’s essential to carefully consider the options’ costs and benefits to make the most suitable choice.

Selecting an annuity

Your marital status is another significant factor in selecting an annuity. If you opt for a single-life annuity, it will only pay out during your lifetime. In contrast, a joint-life annuity provides a full payout to you during your life, and after your death, it typically pays 50% of that amount to your partner until their demise.

Another option worth considering is a guaranteed income period. Under this plan, payments continue until the end of a chosen period (usually five or ten years), even if you pass away prematurely. In such a scenario, the income would be paid to your beneficiaries or estate, offering them financial security.

Certain lifestyle conditions

An enhanced annuity may be the right option for those with certain lifestyle conditions or medical history. Whether you smoke, are overweight, have type 2 diabetes, or have suffered from cancer, heart disease, or other life-threatening conditions, you may be eligible for an enhanced annuity, which results in higher payouts.

The rates are increased to reflect the potential impact of these conditions on your lifespan. Even conditions like excess weight or high blood pressure could qualify you for an enhanced annuity.

Source data:

[1] As of 30/9/23, a standard lifetime annuity with a rate of 7% for a single life with a £100k premium, 66 years old, with a 5-year guarantee. Based on a level benefit that is paid monthly in advance.
[2] As of 30/09/2023, Legal & General Retail estimates that an average 66-year-old with a standard level of health will have a life expectancy of 90 years.

THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, 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 BENEF

Gender Pension Gap

The potential barrier to reaching the same savings levels as men

The gender pension gap is an issue that extends beyond just the disparity in earnings between men and women. It also encompasses other aspects such as financial confidence, engagement with financial products, and socio-economic factors.

According to new research, women are 33% more likely than men to say they do not understand how their pension works, indicating a lack of financial confidence[1]. This lack of confidence may explain why some women are less likely to engage with financial products. For instance, women are 38% less likely than men to have a Stocks & Shares ISA and 32% less likely to have a private pension.

Career breaks for childcare

This engagement gap, along with other factors like the gender pay gap, could result in young women in the UK (aged 22 to 32) having just £12,873 per year by the time they retire in the 2060s1. In contrast, young men are projected to have nearly a third more, receiving an average of £19,803 in annual income.

The research highlights the gender pay gap also contributes significantly to the gender pensions gap. By the age of 27, women already earn £10,000 less than men of the same age. Other factors impacting women’s pension savings include being less likely to hold senior leadership positions and being more likely to take career breaks for childcare.

Reaching the same savings levels

According to the research, young women are currently projected to have £300k less in their pension pots than their male counterparts by the time they reach the current state pension age. Women are also more likely to work part-time or on reduced hours, take career breaks for childcare, act as unpaid carers, or need time off work for medical reasons, such as menopause.

In addition, women often self-identify as having lower confidence regarding savings and investments. This presents another potential barrier to reaching the same savings levels as men.

Addressing this issue requires a multi-faceted approach that includes promoting financial literacy among women, creating policies that support women during career breaks, and addressing the gender pay gap.

Source data:

[1] Analysis based on the following research and assumptions for Legal & General by Opinium Research conducted 2,000 online interviews of people aged 22-32 between the 15th and 29th August 2023 – CPI = 3% • Salary premium = 1% – Salary increase = 4% p.a. (this assumes that salary increases on an annual basis up to retirement at 68) – Median male salary at age 27 = 35,000 – Median female salary at age 27 = 25,000 – Start saving into a workplace pension at age 22, retiring at age 68 -Investment return on pension pot, assuming broad 60/40 asset split, (7% p.a., 4% real) – Qualifying earnings – Currently (£6,240 to £50,270), Historical years (actual LEL and UEL), Future years (increased annually by CPI assumption) – Income based on current Legal & General annuity – fixed rate, single person annuity at age 68, with a 10-year GMPP. Women are 33% more likely than men to say they do not understand how their pension works – 320 (men) – 425 (women) = 105. 105 / 320 = 32.8125% (33%) Women are 38% less likely than men to have a stocks and shares ISA – 324 (men) – 201 (women) = 123. 123 / 324 = 37.962962962963% (38%) Women are 32% less likely to have a private pension -324 (men) – 221 (women) = 103. 103 / 324 = 31.79012345679% (32%)

THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, 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.

Make The Most Of Your Wealth

Opening up a world of possibilities for your future

Like health, the more meticulously you manage your wealth, the longer it lasts. A growth strategy seeks to amplify your wealth over the long haul, opening up a world of possibilities for you. Whether you dream of a large retirement fund, a holiday home, or providing top-tier education for your children or grandchildren, a growth portfolio could be your ticket.

Choosing a growth investment strategy hinges on factors such as age, investment timeframe, risk tolerance, and life goals. Given its long-term nature, growth investing tends to be a good fit for younger investors – those in their 20s, 30s, or 40s – eager to optimise their investments by targeting the higher returns that growth portfolios aim to deliver.

Growth strategy

Contrary to popular belief, a growth strategy is for more than just the young. It can also be a compelling route for seasoned investors who view their capital as a legacy to be nurtured for future generations. Growth portfolios lean towards asset classes like equities and multi-asset funds, which offer the best potential for yielding higher, long-term capital returns.

Growth investors strive for increased exposure to sectors and regions projected to experience above-average long-term growth within these asset classes and funds. This is based on meticulous analysis and stringent investment criteria and may involve carefully managed investments in emerging markets or tech stocks.

Risk appetite

Everyone has a different risk appetite and tolerance for losses when investing. Some investors are highly risk-averse, sticking to savings accounts, while others might be drawn to higher-risk investments like stocks and shares.

Staying invested for the long haul, rather than attempting to trade and time the market actively, is one of the most effective ways to mitigate risk. The age-old wisdom of diversifying your investments – essentially, not putting all your eggs in one basket – rings true here. Betting all your funds on one particular stock or sector is more akin to gambling than investing.

Reinvesting capital

Growth strategies also capitalise on the power of compounding by reinvesting capital and dividends. You may have reached a stage where you want to convert your assets into regular payments that support a comfortable lifestyle or afford life’s luxuries. This tends to be especially crucial for those planning retirement, funding care costs, supplementing their primary income, or financing education.

There’s no universal answer, as the level of income you need is as unique as you are. It depends on your lifestyle, age, health, and goals. Your regular expenses can range from bills and food to significant expenditures like mortgage payments and maintenance costs. And that’s before considering discretionary spending on holidays, hobbies, or education.

Sufficient income

Striking the perfect balance involves drawing sufficient income from your investment without undermining its value. Our role is to guide you in achieving this equilibrium through a diversified investment strategy crafted uniquely for you.

Dividend and interest payments alone may not meet your cash flow needs. Hence, our attention is concentrated on achieving an ideal income level, all while ensuring that the risk involved aligns with your comfort zone.

Investment portfolio

Another critical aspect to consider is making provisions for inflation within your strategy. The goal is to develop a strategy to preserve the real-term value of income derived from your portfolio. We’ll help you explore options and structure your portfolio to cater to your needs.

Withdrawing large amounts from your savings and investments portfolio will inevitably reduce your base capital. Your remaining funds must then work harder and could run out sooner than anticipated. Inflation will also significantly threaten long-term savings, making incorporating this factor into your strategy essential.

THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

Charting Your Financial Future

Tackling retirement anxieties requires understanding your current financial resources

Retirement is often seen as the golden phase of life, a period earmarked for relaxation and pursuing personal interests. However, a recent study has pointed towards an increasing trend of ‘retirement anxiety’, especially among individuals aged over 40[1].

Securing Retirement

The art of de-risking

For many individuals, their pension investments are allocated to funds. These could be funds selected by their pension provider or ones they’ve chosen independently. Traditionally, retirement planning has centred around investing in shares-based funds during one’s younger years. As retirement approaches, the strategy typically shifts to de-risking the portfolio, diversifying into bonds, cash, and shares.

Financial Road Map For 2024

Women Sitting at a Desk in Creative Office

How to devise a robust plan for wealth accumulation and protection

Understanding your financial situation is crucial to achieving both short-term and
long-term objectives. With a detailed insight into your finances, you can maximise your assets and devise a robust plan for wealth accumulation and protection.

Tax-saving measures 

young-adult-man-sitting-on-sofa

What actions to review before the 2023/24 year-end?

Have you recently evaluated your personal tax situation? Is your tax structure optimised for efficiency? As we approach the end of the tax year on 5 April 2024, it presents an ideal opportunity to assess and leverage the various allowances and reliefs available to enhance your tax profile. Allocating time for this review can provide valuable insight into potential opportunities for you and your family.

The vast scope and complexity of the UK tax system may seem daunting. However, navigating it with careful planning can lead to significant financial benefits. Understanding your tax affairs is key to maximising your wealth and ensuring your financial future. 

Take advantage of potential reliefs or allowances

However, the tax landscape has witnessed considerable changes, making the situation more challenging for taxpayers and investors alike. As we near the end of the 2023/24 tax year, every taxpayer should understand the importance of this date and consider their tax position.

Furthermore, 5 April 2024 marks the end of your personal earnings year. Knowing your yearly income will help you understand your tax band and ensure you take advantage of potential reliefs or allowances. The current tax year officially ends on 5 April 2024. The following day, 6 April 2024, ushers in the 2024/25 tax year.

As the tax year end approaches, we’ve provided some planning tips to consider:

Marriage Allowance

This allowance provides a unique opportunity for couples where one partner is a basic rate taxpayer and the other partner’s income falls below the personal allowance threshold. With the Marriage Allowance, you can transfer up to £1,260, which equates to 10% of the personal allowance, from the lower-income partner to the higher-income partner. 

This transfer can significantly reduce the tax liability for the basic rate taxpayer, potentially saving up to £252 in the current year. It’s important to note that this allowance is specifically designed for married couples or registered civil partners. By efficiently utilising this allowance, couples can optimise their combined tax liabilities and make the most of their financial situation.

Employee Tax Reliefs

In the course of your employment, there are several tax reliefs you may be eligible to claim. These provisions are designed to offer financial respite for certain expenses related to your job. One such relief is for professional subscriptions. If you must maintain membership in a professional body as part of your job, you can claim tax relief on these fees.

Another provision is the working-from-home allowance. This relief is aimed at employees who incur additional costs due to working from home. It’s designed to alleviate some financial pressure from maintaining a home office. You may also be entitled to claim relief for business miles travelled in your personal vehicle. If you use your own car for work-related travel, this relief can offer significant savings.

Trading and Property Allowances

These allowances are aimed at individuals who earn small amounts of income from activities like selling items on eBay or Amazon or renting out spaces on Airbnb. Each of these allowances offers up to £1,000 of tax-free income.

Furthermore, if you rent out a portion of your home, you may be eligible for the Rent-a-Room relief. This relief allows you to receive up to £7,500 tax-free from letting out a room in your home.

Individual Savings Account (ISA) Allowance 

You receive an ISA allowance of £20,000 in the current tax year. Contributions can be allocated to a Cash ISA, Stocks & Shares ISA, Lifetime ISA or Innovative Finance ISA. ISAs are a ‘tax efficient wrapper’ which can make a big difference to your money over time. You can combine your ISA allowances for married couples, enabling you to put up to £40,000 in ISAs between you.

Investors who have yet to use up their full ISA allowance should discuss with us the potential to sell shares yielding dividends outside their ISA and buying them back within this tax-exempt wrapper. However, care should be taken as this could trigger a Capital Gains Tax charge.

Junior ISA (JISA) Allowance

In the same vein as the ISA suggestions, children are entitled to a Junior ISA (JISA) allowance of £9,000 per annum. Consider funding a JISA to give your children a nest egg when they turn 18.

The Lifetime ISA

A Lifetime ISA (LISA) applies to individuals aged 18 to 40 who are either planning to purchase their first home or preparing for retirement. With the ability to invest up to £4,000 annually, the government bolsters your efforts with a 25% bonus, up to a maximum of £1,000 per year. This money can be used to buy a new property (subject to certain restrictions) or accessed when you turn 60 to supplement your retirement income.

Pension Contributions

Pension contributions should be a key consideration at the end of each tax year. Contributions to pension schemes can be made on behalf of your minor and adult children and your grandchildren. There are several advantages to doing so. For example, the pension scheme can reclaim basic rate tax from HM Revenue & Customs (HMRC). You’ll receive additional tax relief if you’re subject to a higher tax rate exceeding 20%. You’re establishing a pension fund for your retirement or to pass on to future generations.

In the current tax year of 2023/24, contribution limits have been augmented. The annual pension contribution limit is now the lesser of your relevant earnings or an annual allowance of £60,000 gross, corresponding to a net payment of £48,000.

All UK residents under the age of 75 can contribute up to £3,600 gross (£2,880 net) per year, irrespective of income level. However, suppose your adjusted income (typically your total taxable income plus employer pension contributions) exceeds £260,000. In that case, the annual allowance is progressively reduced by £1 for every £2 of income over this threshold, down to a minimum of £10,000 gross (£8,000 net) for those with an adjusted income above £360,000.

For individuals aged over 75, no tax relief is provided on contributions made. If you can make additional contributions, you can use any unused allowances carried forward from the previous three years. Reviewing your pension status and that of your family members is crucial for effective financial planning.

‘Carry Forward’ Rules

The ‘Carry Forward’ rules allow you to carry forward unused allowances from the previous three tax years if eligible. As we reach this tax year end, you’ll lose any unused allowance for the 2020/21 tax year if it remains untapped. Considering these rules when planning your pension contributions would be best.

Capital Gains Tax Allowance

In light of the changing landscape for Capital Gains Tax (CGT), it’s essential to understand how you can optimise your financial strategy. Before 6 April 2024, you have an opportunity to solidify your capital gains and make the most of the annual CGT exemption, which is capped at £6,000. However, please note that this benefit is not extended to individuals who are taxed on a remittance basis with income and capital gains exceeding £2,000.

One effective method to crystallise capital gains involves strategically selling and repurchasing stocks and shares. This approach enables you to maximise the annual CGT exemption. It offers an opportunity to elevate the base cost for future sales, potentially reducing your tax liability in the long run.

However, knowing the timing and the party involved in the repurchase is crucial. To derive the maximum benefit from this strategy, the repurchase should ideally occur after a gap of more than 30 days. Alternatively, the buyback can be executed by your spouse, registered civil partner or through an Individual Savings Account (ISA).

Dividend Allowance

For those with invested assets, the dividend allowance can offer substantial benefits. You can receive up to £1,000 per year tax-free, with dividend tax rates applied to amounts over £1,000. The dividend allowance will be reduced to £500 per annum in the 2024/2025 tax year.

Gifting for Estate Planning

Certain gifts can be exempt from Inheritance Tax, immediately leaving your estate upon gifting. These are commonly referred to as exempt gifts and include gifts presented to your spouse or registered civil partner. In addition, contributions to charities or political parties are exempt as well as gifts valued up to £250, provided each gift is given to a different recipient and is the only tax-exempt gift they’ve received from you within that tax year. This often encompasses birthday and Christmas gifts derived from your regular income.

Also exempt are wedding gifts from a parent to their child up to £5,000, from grandparent to grandchild up to £2,500, or up to £1,000 to anyone else. Additionally, you’re allocated an annual exemption each tax year, allowing you to gift cash or property up to the value of £3,000. This can be given to a single individual or divided among several recipients. If the previous year’s exemption wasn’t utilised, it can be carried forward to the current tax year, effectively doubling the exemption to £6,000. Understanding these exemptions can help in efficient tax planning and potentially reduce your Inheritance Tax liability.

Other Available Allowances

Your Personal Savings Allowance (PSA) refers to the amount of savings interest income/growth you can earn tax-free. Current levels are set at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers, however, are not entitled to this allowance.

Don’t leave it to chance. Are your finances arranged as tax-efficiently as possible?

Time is running out if you want to ensure your personal affairs, family and business affairs and plans for the long term are arranged tax-efficiently. For further information on tax year-end planning opportunities, please get in touch with us. We’re here to help you make the most of your money.

THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE). 

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, 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.

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