Financial Planning: create a plan for your future life

Benjamin Franklin once said ‘If you fail to plan, you plan to fail’.

Index-Linked Annuity, enhanced annuity, drawdown, phased drawdown, third way annuity, spouses pension?...just a snapshot of the long list of options to decide when it comes to making one of life’s most important financial decisions.

At BROADSTONE, we believe that the solution to enjoying a long and financially secure retirement lies in the planning – tell us what you want in retirement and we will help you plan to achieve it.

Saving for retirement does not have to mean saving into a pension only. Once you have decided the lifestyle you want to have in retirement, we can help you establish what assets are available to incorporate into your plan. It might be an expected inheritance, rental income, an ISA portfolio or proceeds from the sale of a business that will provide the income stream to fund the longest holiday you are likely to have embarked on. 

Should your plan identify a ‘funding gap’ we will recommend the most appropriate solution to ensure this gap is bridged by the time you take that holiday. If an alternative to a pension is the most appropriate solution, we will tell you so and why.

A Financial Planner should do as their title suggests – plan.

Decide to engage with BROADSTONE and your Financial Planner will create your plan and review it on a regular basis, taking into account relevant changes in your circumstances as and when they happen.

Retirement just got a whole lot simpler with a financial plan - we call it life planning.

Peter Nutini

Consultant

Telephone: +44 (0)20 7893 3456

Email: getintouch[@]broadstoneltd.co.uk

Budget 2014: Getting Advice

It seems likely the retirement advice market will evolve into a two stage process.

Retirees will first need to learn about their options and the implications of those options. This will be the ‘guaranteed guidance’ much heralded by the Government. There are hundreds of thousands of people retiring each year and the Government wants each to have a face to face meeting so it is unclear how this will be delivered. But it will be free and impartial so prospective retirees should first take advantage of this offer when it is available. This should allow retirees to understand and perhaps come to a conclusion on the best option for them.

If their chosen option is more than hiking all the money out of their pension as soon as they can they may well need further advice on how to set up the Drawdown or which annuity to buy, what investments to hold and other such matters. This more specific advice is likely to be still carried by the qualified IFA community at a cost to the retiree. There is a danger that the first phase will encourage some to go it alone and no doubt some will make expensive mistakes.

It will be interesting to see how the FCA reconciles their current view of drawdown as a ‘high risk product’ with any new advice process.

Simon Nicol

Pension Director

Telephone: +44 (0)20 7893 3456

Email: contactus[@]broadstoneltd.co.uk

Many Trustees are missing the opportunity to reduce risk

Things are looking up for pension scheme funding – at least from an investment point of view. However many Trustees are failing to seize opportunities as they are presented, or simply believe that better times await.

Gilt yields have risen from their lows in 2012 and this has resulted in the present value of liabilities reducing. For a typical pension scheme, the impact of rising yields is expected to have reduced the present value of the liabilities of a typical scheme by approximately 10% to 15% since July 2012. Inflation pressures (at least in the short term) have eased with CPI falling below 2%.

Trustees should also have seen strong improvements in investment returns with the MSCI World Index providing 16.8% p.a. returns over the five years to 28 February 2014 – certainly ahead of the likely investment returns assumed in the average pension scheme’s funding assumptions.

What does this mean for Trustees and sponsors? For those that haven’t planned, it simply means that any deficit could be made good sooner, and employers may hope that any recovery plan payments will reduce or cease early.  The belief is that investment risk needs to be maintained if that hope is to be realised.

Trustees don’t need to go that far back to recall similar ‘feel good’ moments, such as the end of 2007 when many schemes were in a much healthier funding position before the financial crisis of 2008/2009 set in.

For any scheme that is closed to new entrants or accrual, or whose liability is having an impact on the balance sheet of the sponsor, simply doing nothing should not be an option.

There are three issues the Trustees should be considering:

·    Given the improvement in funding above where we thought we would be at this point in time, can we reduce the current level of return required (i.e. can we have less exposure to growth (or risk) assets without impacting on the schemes ongoing funding basis and recovery plan?

·    Where growth assets are still needed. Is it possible to deliver growth more efficiently, with less risk?

·    Given the rise in gilt yields and falling inflation expectations can we use this as an opportunity to reduce funding level volatility that arises from changes in interest rates and inflation?

Of course those Trustees who do not have a plan in place, answering these simple questions can take time. With Trustees typically meeting on a quarterly basis, there is the risk that opportunities would have evaporated by the time they are ready to act.

According to the Pensions Regulator’s ‘Occupational Pension Scheme Governance Survey’ (2013), 45% of pension schemes do not have a long term de-risking ‘flight plan’ in place.

BROADSTONE has a five step de-risking plan to help guide the trustees through the design and governance process to ensure that opportunities to de-risk are not missed.

Peter Dean

Investment Consulting Director

Telephone:  +44 (0)20 7893 3456

Email:  contactus[@]broadstoneltd.co.uk
 

 

Why this pension consultant is now making an extra pension contribution

The proposed new freedoms in the Budget to withdraw unlimited funds from pensions is a game changer for many, but particularly those like me nearing retirement. It is the opportunity to defer income for a few years avoiding 42% tax and NI and take the fund out when needed as income at an effective rate of 15%. Not a bad return.

By way of example, £10,000 of income can be taken as income resulting in an immediate net payment of £5,800 (after 40% tax and NI). Or this could be used as a pension contribution avoiding all immediate tax charges. When employment income has ceased it should not be too difficult to arrange matters such that this fund is drawn during a year when basic rate tax only is paid. Then the £10,000 is paid £2,500 tax free, £7,500 taxable at 20%, net result £8,500. A 46% return! Any growth on the funds in the tax free environment of the pension only adds to the benefit.

With the big increase in ISA allowances allowing couples to invest £30,000 a year, canny investors will be able to top up existing ISAs to generate substantial tax free income, and many couples will be able to keep the taxable element of their joint incomes income permanently in the basic rate tax band.

Pensions have been the subject of much criticism and for many lost their appeal. The new rules will make them once again very attractive tax planning vehicles and I for one will be taking full advantage whilst it lasts.

 

Simon Nicol

Pension Director

 

Telephone: +44 (0)20 7 893 3456

Email: contactus [@] broadstoneltd.co.uk

 

 

 

What will you do with your pension pot?

From 2015, individuals will be broadly be able to do what they like with their pension pot. Some commentators have suggested that, having saved all our money for retirement, we will get to a point where the sight of this money and its availability will go to our heads and we will all be booking one way trips to Vegas and heading for the Ferrari garage.

This is, of course, utter nonsense - the majority of human adults seem to have evolved an ability to take care of themselves over the millennia.

This is not to ignore the fact that certain individuals will fritter away what they have managed to save. They could become reliant on the state, for example being entitled to the state pension and other benefits, as they would be now. However, the reality is that most people get up in the morning, try hard at their job and do their best to take care of themselves and their families. That's not suddenly going to change.

There are though other disadvantages around the changes to pensions. They could well make annuities more expensive as their take up will be reduced.  In my opinion, this is a necessary cost to give people the confidence to invest more for the longer term, knowing that their retirement savings have now become a lot simpler and a great deal more flexible.

Matthew Phillips

Managing Director

Telephone: +44 (0)20 7893 3456

Email: getintouch [@] broadstoneltd.co.uk

Are auto enrolment contributions alone enough for retirement?

Following on from Rob’s last post on why we’re all being automatically enrolled, I thought it would be a good time to tackle whether these auto enrolment contributions alone are going to be enough for retirement?

In short, it’s unlikely.

Now the contributions are being phased in. Using the default earnings basis the contributions will start at 1% for the employee and a minimum 1% for the employer, from October 2017 this will rise to 3% for the employee and a minimum 2% for the employer, and finally from October 2018 it will be a 5% employee contribution with a minimum of 3% from the employer. So from October 2018 it will stabilise at a total of the equivalent of 8% of your salary being paid into your pension.

But what does that mean in terms of what you receive when you retire?

Well to put it into context, Scottish Widows 2013 UK Pensions Report says that “the average British worker anticipates stopping work around age 66 and is looking for retirement income of £25,000 a year. That would require savings of £1,000 a month from age 30.”

On an equivalent salary of £25,000 a year now, that would be a contribution of 48%. For many receiving only the minimum employer contribution of 3% at 2018, that means they will need to find a contribution of 45% from their own salary!

To be fair, many people are looking to live on around half their salary at retirement, but that still means on a salary of £50,000, you would need to contribute 21% of your salary from 30, receiving 3% from the employer.

Now you may not want to retire by 66, or need an annual pension of £25,000, you may need more, you may need less. The message is that you should take this as an opportunity to think where you’d like to be at retirement, and whether or not the auto enrolment contributions alone will ensure you have the kind of retirement you can look forward to.

Charles Goodman

Consultant

Telephone: +44 (0)20 7893 3972

Email:  contactus[@]broadstoneltd.co.uk

BROADSTONE’s Matthew Phillips’ reaction to the Budget 2014

Actually two major announcements for everyone to be aware of, and really important from a financial planning point of view.

Firstly, the ISA has (finally) been made simple and more relevant.  Rather than worrying about whether you go to a cash ISA or a stocks and shares and becoming confused about the different levels, this has been done away with so that you can either hold cash, or investment in the same account.  This will make it simpler, more straight forward and encourage people to save and not be put off by perceived complexity.  The additional increase to a nice round allowance of £15,000 means that a couple can now shelter up to £30,000 of savings and investments each year and not pay tax.  Again this is really welcome news and as I will point out later makes our savings system much more straight forward.

Secondly, the changes to Defined Contribution Pensions.  This is a really significant change.  Most people now through auto enrolment will be being placed into a defined contribution pension scheme.  The Chancellor has announced that these will become much more flexible.  You will not have to purchase an annuity, you will be able to draw out income when you want and to the amount you want.  

This means that short and medium term savings could be carried out through ISAs and long term retirement saving into what is beginning to look like a “big ISA with tax breaks”, your defined contribution scheme. This is a much simpler set of affairs for everyone going forward and actually runs the risk of looking joined up.

Over the longer term, I suspect (and hope) that this simplification will lead to greater pension take up, now that some of the perceived inflexibility has been done away with. And while I welcome the simplicity, people will still need to have a comprehensive financial plan because this additional flexibility means that the need to take advice is greater.

Matthew Phillips

Managing Director

Telephone: +44 (0)20 7893 3456
Email: getintouch [@] broadstoneltd.co.uk

 

Protecting and Cascading Wealth Through the Generations

One area where the BROADSTONE Private Office has been advising a number of families recently is the area of succession planning.

 

The UK tax regime has consistently encouraged planning for Inheritance Tax but rarely is much thought given to the consequences of cascading wealth to the next generation.  In this blog I’d like to give you some ideas on what to consider. 

One of the key components to a successful succession plan is preparing the next generation to the consequences of wealth inheritance.  If assets are passed without clear thought and education, the recipients are often stressed by the responsibility or become care free about their own life aspirations.   I have seen a number of situations where poor planning has proven the Lancashire proverb of “clogs to clogs in three generations”* - an aphorism based on the observation that it takes one generation to found a business, the next to build it, and the third to spend it.

The obvious place to start a planning conversation is wills and their effectiveness in the event of an untimely death.  In addition pre-nuptial and post-nuptial agreements are now receiving more favourable consideration by the courts and so should always be discussed with older children. We have a financial education programme where we discuss these in more depth with families.

Another important point to remember is that plans must be reviewed on an ongoing basis.

Like all good financial planning the subject of inheritance starts with a conversation with advisers. If you are interested in taking the first steps, please do give me a call.  Our team would be delighted to provide further information or introduce the appropriate adviser.


Mike Batchelor
Private Office

Telephone:  +44 (0)20 7893 3456
Email:  getintouch[@]broadstoneltd.co.uk

* Dryden's Fables Ancient and Modern (1700), ‘Seldom three descents continue good.’

A school lesson

 

Ok, the schoolmaster’s hat is going back on again, bit of a lecture this one. We’ve touched on all sorts of technical details of auto-enrolment so far, but why are we doing this in the first place?

 

The first reason is that the State pension is up the swanny (note: technical term). We have an ageing population who, thanks to medical science, just refuse to die off gracefully. There are simply not enough young people to support the rapidly expanding over 65 population at the moment, so expect to see some changes to how the State Pension operates in the coming decade.

 

Presently, those receiving the Basic State Pension get roughly £5,700 per year, which is below the poverty line of £6566* - not ideal. So we can either raise taxes to increase the state pension or get people to pay in to a personal / company pension scheme. The Labour government of the time chose the latter option and enshrined it in the Pensions Act 2008. So now we have what was originally called pensions compulsion, now called auto-enrolment.

 

We’re actually behind many other countries around the world in implementing this. New Zealand has the Kiwisaver and Australia has a range of Superannuation schemes – even Chile is further along in its auto-enrolment provisions than we are!

 

 

Rob Barksfield

Auto-enrolment Consultant
  

Telephone: +44 (0)20 7893 3972

Email:  contactus [@] broadstoneltd.co.uk  

*Monitoring poverty and social exclusion 2013, Joseph Rowntree Foundation

 



 

 

Will your tax diversification be in the right shape when you retire?

No, this isn’t another Blog about pensions - this Blog is about tax risk.

Over the last 35 years Income Tax has fallen from a breath-taking 98% (1978/79) to 45% and Capital Gains Tax has bounced from 30% up to 40% and down to 28%.

As a result, tax risk is a serious consideration in your retirement planning strategy especially when you need to retain as much of your net wealth as possible.

In managing tax risk, diversification across the various tax regimes is as important as diversification across the various investment sectors and asset classes.

With ISA Millionaires becoming more prevalent those who took full advantage of their annual allowances are laughing all the way to the bank. Likewise, those with investment strategies that take full advantage of the annual capital gains tax allowance are rubbing their hands with glee.

Tax exemption, Tax deferment and Tax relief are a starting point in all financial planning scenarios.

Transferring assets to your spouse/partner or assigning investments to beneficiaries can reduce, or defer, the ultimate tax point further; whilst sheltering your capital from inheritance tax (without giving it away) not only reduces your inheritance tax risk but allows your family to retain 100% of your tax-sheltered assets.

If you have ‘planned for life’ without ‘life-planning’ what gaps might you have in your tax risk?

At BROADSTONE we specialise in Life Planning – why not give us a call.


Helen Wilson
Consultant

Telephone:  +44 (0)20 7893 3456
Email:  getintouch [@] broadstoneltd.co.uk