Tag Archive: pension

  1. How to save for your children

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    With the cost of education and housing rising, it’s become more commonplace for parents and grandparents to save for their children and grandchildren. By planning ahead, they can maximise the impact those savings will have.

    What’s your outcome?

    Whether you’re saving for yourself or your children, the first thing to think about is why you’re doing it. This focuses your mind on your goal, and gives you a timeline for your investment.

    The first big-ticket items that most parents say they want to help their children financially with are either a car or going to university. Other popular reasons to save for your kids include travel, a wedding or to help them onto the housing ladder.

    Where to save?

    You’ll need an account or wrapper for the money you’re saving. You could use:

    • A straightforward bank account, in your name or your child’s
    • An ISA in your name (your child is eligible at age 16)
    • A Junior ISA in your child’s name
    • A general investment account to put money into the stock market, in either of your names
    • A pension in your child’s name (they’re eligible from birth!)

    Each wrapper has advantages and disadvantages, and when you’d like your child to access the money is an important factor.

    If they’ll need it within the next five years, you should stay out of the stock market and use a savings account.

    If they don’t need to access it for at least five years, and preferably seven or more, then the returns offered by the stock market should be taken via an ISA or investment account. Over the long-term, you should be looking at around 5%+ annual returns at the lower end of expectations.

    A Junior ISA is a popular option because it’s easy to open one. But it comes with a potential downside: at age 18, the money automatically reverts into your child’s name and becomes their property – so your plan to save for university fees may turn into a car or holiday instead!

    If you’re taking a long-term view towards their retirement, which can be a great option for grandparents looking to leave a legacy, then you should use a pension fund. You can save up to £240 a month in a children’s pension – but they can’t access the money until they reach retirement age. That’s currently 55 years old but is certain to rise by the time a child born today gets there.

    The big advantage of using a pension is the vast amount of time the savings have to enjoy compound interest. That means a modest amount can become substantial: saving £50 every month from birth until age 25 will turn into £1m by retirement age if the pension averages 9% annual returns.

    Although that’s a best-case scenario, it highlights the benefit of the pension option and the power of compound growth over time.

    How much risk should you take?

    As an investor, the returns you get are linked to the amount of risk you’re prepared to tolerate. You can decide how much exposure to the stock market you want in your investment, and the longer the investment, the more exposure you can risk.

    For a pension in your baby’s name, the money will be in the markets for over 50 years, so you can go for up to 100% exposure to the market in the early years. Peaks and troughs are inevitable, but with so much time on your side you should try to maximise potential returns.

    As your child gets older, this level of exposure should be adjusted. By the time we reach retirement, we don’t typically want a lot of our investment in the markets because we need more certainty on our money.

    Whichever vehicle you use, as a parent or grandparent start with the outcome you want and use that to determine how you can best help your loved ones.


  2. How much should you be saving for your retirement?

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    How much should you be saving for your retirement?

    In most cases, the answer to this question is more than you’re putting in now! The minimum that you should be putting aside for your retirement plans, if you’re free of unsecured debts like credit cards and loans, is 12.5% of your income.

    But why 12.5%? Because it’s the first hour of an eight-hour working day, so the first hour you work every day goes to paying yourself before anyone else, including HMRC. That’s not the maximum proportion I recommend – it’s the minimum. If you’re nowhere near 12.5%, then it’s a case of trying to build up to it.

    An important step in doing that is to cut out all unnecessary expenses and follow my Bank Account System to reduce your outgoings.

    Mindset matters

    There’s no hiding that 12.5% is a chunk of anyone’s income, and we need to enjoy life now as well as in the future; we want to take holidays, have a great Christmas with the kids, enjoy new experiences – retirement is not the target of our life.

    12.5% is a starting point. Some people will think, ‘no problem’. Others will think I’m off the planet, because every month they have more days left over than pay cheque.

    That comes back to step 2 of my book The Money Plan: get financially well organised. You’ve got to know what you want in life and have a plan in place to get there. You’ve got to get your mindset right, which is why I spend about one-third of The Money Plan on financial mindset. It’s that important.

    If you are miles away from your targets, go through your expenditure items and see if you can squeeze them down. Look at all payments coming out of your account and ask the holy trinity of questions about each: do I need this, do I want this, can I get a similar experience for less elsewhere?

    You’ve got to plan for your future, and 12.5% is just the start; if you’re in your 50s or 60s with little in your pension pot, you’ve got to make big sacrifices to put more away so you can make your pension income last longer in your retirement.

    With that said, I’m realistic. If your employer pays a significant contribution to your pension, say 10% or even 15%, then that can make a big difference. You might even decide to redirect your savings onto your mortgage.

    The 40/40/20 principle

    After all unsecured debts are repaid and the financial fundamentals such as emergency cash, a will and power of attorneys are in place, I refer to what’s left over between your income and expenditure as a snowball, a surplus.

    A good way to be financially organised is to take that snowball and allocate it 40/40/20: 40% goes to overpaying your mortgage, 40% goes into your retirement plan, and 20% goes back to you to enjoy today.  I repay 20% back to enjoying today because I strongly believe that although we need to plan to ensure we have sufficient income for when we decide to stop working and retire, we should not live our life for our retirement – for the last quarter of our life, the 40/40/20 rule helps us achieve this financial balance in life.

  3. Save your first working hour and make it automatic

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    Helping clients to make the right choices for regular savings and lump sum investment is one of the key roles of financial planners.  Making the wrong choices can cause serious financial detriment and this consequence, together with relative complexity over the choices and difficulty in “self-serving” the answers, are the three key components underpinning most needs for advice.

    Self-evidently an understanding of the investor’s attitude to risk, fear of loss and time-based financial goals (along with an understanding of all their financial assets) will substantially underpin the choice of investment fund or funds appropriate for the client. As a result of this understanding an appropriate element of risk reduction will be baked into portfolio construction through the development of an asset allocation strategy.

    A desire for tax efficiency will also usually be present, or at least it should be.  After all, reducing “tax outflow” will enable financial goals to be more easily reached. Tax efficiency will also allow a little more investment risk to be taken with the resulting possibility of more return.  Nothing being guaranteed of course – well, not without cost!

    In the quest for tax efficiency for the portfolio selected, pensions and ISAs are the recognised “no-brainers”. Once these are “filled up” though (limits reached) then (leaving aside VCT/EIS for the moment) attention will turn to investment bonds and collectives.  The tax implications dependent on the underlying portfolio can be material.  The changes to dividend taxation, the taxation of interest and capital gains tax all have a role to play – along with charges and how and when they are deducted of course.

    As well as advising on investment portfolio and product wrapper choice, though, it seems that we have a job to do to encourage some people to save a bit more in the first place.  According to new figures from the Office for National Statistics (ONS), UK households have responded to a tight squeeze on incomes from rising inflation, taxes and falling wages by saving less than at any time in at least 50 years.  It seems that only 1.7% of income was left unspent in the first quarter of 2017.  This is the lowest savings ratio since comparable records began in 1963.

    The UK consumer trend since Brexit seems to have been to borrow and spend – a powerful but worrying combination.  Powerful, as it has caused the economy to continue to grow.  But, worrying because, as the savings ratio falls, economists and policymakers are likely to be worried about how much consumer spending can contribute to growth in the months ahead.  Apparently, over the past 54 years the savings ratio has averaged 9.2% of disposable income.  The trend currently, though, is materially declining.  In the first quarter of 2016 the savings ratio was 6.1%, already below the long-term average, and it fell to 3.3% by the fourth quarter of the year.

    The ONS said that the fall was mostly caused by a rise in taxes on incomes and wealth, which led to a fall in household disposable incomes that was not matched by a corresponding drop in spending.

    Part of the rise in taxes was temporary, the ONS said, resulting from high tax payments in early 2017 on dividends paid a year earlier, but it added that not all of the drop was explained by temporary factors.

    They say “the underlying trend is for a continued fall in the savings ratio”.

    It seems that the Bank of England had expected the savings ratio to rise in the first quarter of the year.  In its May inflation report, it thought the drop at the end of 2016 was due to volatile factors and “the headline saving ratio is expected to have risen slightly in the first quarter of 2017”.

    Now it may well be that this “low savings” malaise is less likely to be present in the clients of financial planners with whom the planner has a strong and influential relationship. In which case maybe the planner has a strong role to play in helping the client embed a regular savings habit in their children/grandchildren. To do so can, obviously, have really beneficial effects for individuals’ long-term financial security.  Establishing the right habits early in life is undeniably a good thing – but eternally difficult in this day and age.

    Giving a young individual the gift of financial discipline founded on an acceptance of deferred gratification is one of the greatest things a financial planner can do to enhance intergenerational financial wellbeing for their clients and, ultimately, for themselves by protecting and expanding their client relationships.

    We suggest you pay yourself first, it’s the best financial discipline you can have and to make it easier on yourself, make the saving automatic.  Saving the first hour of your working day.  So if you’re working an 8-hour day save 1 hour or 12.5% of your gross income.

    The best place for most people to save this will be an automatic deduction from your pay into your employers workplace pension, so it’s deducted before you even see it!

    Allow the money to compound and grow overtime, so you will have a happy retirement.

    Happy saving folks!

  4. Auto-Enrolment – It’s Here And It’s Happening!

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    It is a fact that people are living for longer. There are currently 13,000 centenarians in the UK, but this figure is expected to reach 500,000 by 2066! (more…)

  5. Important News for Employers

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    Auto-enrolment is here and affecting every employer in the UK. It’s important you review your arrangements now. (more…)

  6. Avoiding Tax Avoidance Confusion

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    Lexington found that few people had heard of the K2 tax avoidance scheme until it was linked to various wealthy individuals.

    K2 is an offshore arrangement that can reduce an individual’s income tax liabilities to as little as 1%, according to its promoters. HMRC is now investigating K2 in depth and the Government has promised a more general crackdown on tax avoidance.


  7. 2013 Budget: Treatment of VAT

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    This post outlines the latest treatment of VAT as highlighted in yesterday’s budget.

    The VAT registration threshold will rise from £77,000 to £79,000 and the deregistration threshold will increase from £75,000 to £77,000, both from 1 April 2013.


  8. Advice Before Retirement

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    I was frustrated. I had been running a successful business for many years and I knew that I should have been saving for my retirement, but I just couldn’t afford it. I needed a strategic plan so my retirement dreams could become a reality, ensuring my family would be looked after.


  9. Financial Planning in Retirement

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    I had taken advice from the firm that looked after the company pension scheme at the place where I was working. After we ceased trading, and I retired, I was looking for another adviser to help me to manage my affairs. From previous experience, I was concerned that all advisers were salesmen and whomever I met would simply try to sell me a product.