The Importance of Financial Education – The Pensions Perspective

Pensions suffer from a few key features that can be problematic.

 

Pensions are really important

They constitute some of the major financial decisions of your life. The decisions individuals make through their working lifetime will directly determine the timing and quality of their retirement years.

Pensions are often complicated

Pensions are complicated (sometimes unnecessarily so) and come into contact with an individual’s ability to make a number of decisions around:

·         budgeting (how much to save)
·         planning (when to save)
·         strategy and risk assessment (investment choices)

Pensions are boring

I am amazed but when I mention I work in pensions at parties (yes we pensions people do go out sometimes) when I mention the industry I work in people glaze over. The main reason that pensions are boring is that procrastination power is very strong and other more immediate calls on an individual’s income will always seem to be more attractive, and in some cases they’ll be right, but it is clear that the earlier you start the better the outcome will be.

Pensions will affect nearly everyone

All of us will have some aspiration to stop work at some point and while many think their house is their pension (it isn’t, it’s your home!) having a pension fund is the most efficient method to plan for that eventuality. To have a pension you need to defer your income now (in the most simplest that’s what a pension is, deferred income).

There are lots of different types of pensions and employers are now obliged to get involved and provide them for most of their workforce via the Government’s auto-enrolment legislation. So a pension should be a everyday occurrence for almost all of us. Understanding what is happening and why will make sure that people make the informed and correct decision.

Financial Education is the answer

To my mind the answer to all of these problems is clear, and that is through education. People should be given the skills to evaluate the importance of planning their financial future by appreciating some of the benefits of pensions (tax breaks, the employer contribution and compound interest). This begins with the skills to budget, plan and assess strategy all the things that MyBnk do for their young people. Okay, I concede that pensions will still be boring but if young people are given the ability to understand the importance of starting early, deferring some of their income for their future, together with taking some extra money from their employer and the tax man, then we will have people that will be able to enjoy their retirement years. As a pensions consultant that it is at the heart of what I do and I see the work that MyBnk do as key to achieving that.

David Brooks

Pensions Consultant

Telephone: +44 (0)20 7893 3456

Email:  contactus [@] broadstoneltd.co.uk

Auto Enrolment: Thinking about data & systems yet?

My dad is a systems integration engineer and right now I can really empathise with him! His job basically involves taking a number of components that were never intended to work together and trying to force them to work seamlessly as part of a process.

The parallels are there for auto enrolment pensions at the moment, with trying to integrate the HR systems with payroll system to get all the necessary employee information out to input into the auto enrolment system. Sounds simple when you start to talk about it, right? Then you realise that yes, these systems can export some of the data (usually not everything that you want), but never in the format required or quite in the right way to make the job straightforward.

I find that conversations about pensions data & systems early in the auto enrolment planning stage are an absolute must.  Have a call or a meeting with your payroll provider, auto enrolment consultant and pension provider as soon as possible to understand the challenges ahead.

 

Rob Barksfield

Auto-enrolment Consultant

Telephone: +44 (0)20 7893 3456

Email:  contactus [@] broadstoneltd.co.uk

Budget 2014: Trivial Pension Pots – an inappropriate use of words?

Whilst everyone is digesting the impact of the Budget announcements, there is little doubt the overall relaxation and potential reduction in the ‘tax take’, from our pension funds, has been well received.

Sadly, the use of the word ‘trivial’ with regard to smaller pension funds is at best inappropriate and at worst unavoidable due to our modern working practice and a more transient population. No matter how small a pension pot it is important to acknowledge that its owner has worked hard to build up these funds and certainly deserves better recognition for their efforts than – ‘trivial’.

That said, these same individuals have potentially been handed one of the most favourable retirement planning strategies in the Budget.

The ability to withdraw 100% of a fund, below £10,000, as a lump sum (up to three times in their lifetime) with 25% of the fund being tax free and the remainder being taxed at their marginal rate increases an individual’s overall retirement flexibility - especially as there will be no requirement to purchase an annuity.

Amassing several small pension funds, over a lifetime, is currently the norm and not the exception. But with auto enrolment gathering momentum the likelihood for everyone to have several small funds in the future highlights that retirement planning will become more important and possibly more complex in future.

For some withdrawing 100% of their pension funds, as cash, may be wholly appropriate; whilst for others the decision may not be as clear cut.

Whichever side of the fence you sit on in the current retirement planning debate and no matter the size of your pension fund there has never been greater need for independent financial advice than at present.

 

Helen Wilson

Consultant

Telephone:  +44 (0)20 7893 3456

Email:  getintouch[@]broadstoneltd.co.uk

 

 

Budget 2014: Thinking about retiring? Where to get advice.

One of the key areas that the Chancellor announced was the Government’s wish that everybody should get impartial advice when retiring.  As someone who has now long worked in and argued for a professional, independent financial planning sector, this was music to my ears.  However, there is now a huge gap in who is going to provide this advice, how it’s going to be provided and what is going to be provided.  Where should prospective retirees get advice now?

I have to declare a bias. I am the managing director of the country’s largest independent fee based financial planners.  I will obviously be saying that clients should seek the advice from a fee based adviser.  As a professional, clients should seek the help of highly qualified individuals who will for a defined and clear fee give them advice as to what to do next and help them through the next steps.  Obviously, professional advice provided by people who have spent many years studying for qualifications and gaining experience does cost money.  Whilst many clients are only too happy to pay for the value of the advice and peace of mind that they get, we need to be clear that in certain circumstances the cost of independent advice becomes marginal or even detrimental where clients have less money.  What can these people do?  To an extent the sources of advice now have become limited. 

The Government has launched and heavily marketed the Money Advice Service.  The MAS is to an extent a misnomer.  Legally you can’t provide advice in the UK on financial planning without being regulated by the Financial Conduct Authority.  The website gives useful information and but is essentially an information portal.  It tells you what you could do as opposed to what you should do.

Many of the high street banks have now stopped providing financial advice, and when they do they will normally be restricted.  This means that they can only provide advice in certain areas and for them this will be limited to the products that the bank provides.  As most banks do not provide pension provision or advice heading here may mean that the retirees get some cheap advice but expect it to be limited.  Individuals working in any regulated business have to comply with FCA’s 11 principles of business conduct, which includes dealing with clients with integrity and due skill and care.  Whilst many individuals in the banking world do and have always adhered to these principles it is stating the obvious that up to now the culture in many banks has led to mis-selling and a general lack of trust that these institutions are now having to address.

There are some online services but nothing that at the moment has got any traction and this is still very much in its infancy. 

Finally, the insurance companies may well provide you with generic advice but this again will either be limited or information.

As you can see there are only a limited number of places that retirees can go to.  The advice gap does exist and so it will be interesting to see how the Government intends to bridge this gap to provide advice to retirees in 2015.

Matthew Phillips

Managing Director

Telephone: +44 (0)20 7893 3456

Email: getintouch[@]broadstoneltd.co.uk

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