Monthly Archives: April 2019

To downsize, or not to downsize?

Planning your next move for a comfortable retirement

It can be a daunting prospect to think about selling the family home, but it is a decision that many decide is the right choice for them once the children have long moved out and the upkeep seems too onerous. However, people don’t often consider the impact this could have on their retirement, according to new research[1].

This has revealed that if people have decided to downsize, they could unlock value from their home, providing the often-overlooked solution to helping them achieve a comfortable retirement. The new report found that UK adults would like an annual retirement income of £39,773 to be comfortable in their later years. This is up from £26,184 in 2016.

UK adults’ retirement savings expectations

Expectations for larger incomes in later life may stem from retirement savings increasing substantially over this time. The research found that the average size of a pension is up 7% over two years, from £174,555 to £186,617. In keeping with this, UK adults expect to have retirement savings of £215,852 by the time they stop work – up 27% from 2016 – when the expected amount was £169,594.

After the State Pension of £8,546 per year[2], £31,226 per year extra would be needed to meet people’s desired income target of £39,773. At current low annuity rates, this income would need a pension pot of £600,515 for a level annuity.

Mind the gap – funding a desired lifestyle

Despite the increase in pensions savings, the bigger increase in expectations for income in retirement has meant that the pensions gap – the shortfall from what people will need to fund their desired lifestyle, if they bought an annuity, and what they expect to have in their pension pot at retirement – has gone up from £370,000 to £385,000 over two years.

Post-pension freedoms, there are several options for retirees to consider rather than having to buy an annuity, providing myriad ways for retirees to meet their income goals. For example, the research showed that figures revealed that those choosing to move to a smaller property, or ‘downsizing’, could release a significant amount of capital that could help them achieve the lifestyle in retirement that they really want. 

Providing motivation for a move to a smaller property

Once the children have left home, moving closer to public transport links or to a single-story home can often provide motivation for a move to a smaller property that may be more suitable. Using average UK house prices for homes of different sizes, figures show that the £385,000 shortfall could be significantly plugged if downsizing from a four-bed to a two-bed property. This would immediately increase savings by £287,286, or if invested over five years could be worth nearly enough to fill the gap, at £349,527[3]. If the decision to downsize is made earlier in life, then the funds could be invested over ten years[3], amounting to £425,253.

Planning to fund retirement by continuing to work

Despite the benefits of downsizing and increasing retirement savings, 83% of those surveyed said they did not intend to downsize to fund their retirement, increasing to 87% for over-55s. More people said that they plan to fund their retirement by continuing to work, either in their current role (11%) or by taking up a new job (9%), than by downsizing their property.

Considering the maximum annual pension contribution per tax year of £40,000, releasing a large amount of cash in one go from downsizing your property would mean only a portion can be invested directly into a pension. However, any money that is invested in this way would benefit from 20% tax relief before any investment return. The remainder can be invested or held in cash based on appropriate advice for that individual.

Monumental life decision that can be unnerving

Making the choice to downsize is a monumental life decision that can be unnerving to think about, but it can also have a great financial impact, providing a major boost to your retirement fund. Deciding on the right time to downsize can also be difficult, but the process can be easier if not left too late.

Moving to a smaller home nearby will lower the pressures that come with the upkeep and expenditure of a large property while keeping you near to any friends or family who live in the same area. Also, moving wealth from an illiquid asset such as property to a liquid asset such as cash has the added benefit of enabling tax planning, which could reduce any potential Inheritance Tax liability. It can be useful to take emotion out of the equation and try to be as pragmatic as possible – it’s easier said than done, but it can help with some very tough decisions that need to be made.

Looking towards a patchwork of savings and assets

The research showed greater realism about how long it might take to accumulate assets to fund retirement, and what will be needed to reach financial goals in retirement. On average, people would like to retire at age 61, up five years from when the survey was last undertaken in 2016, when this was 56. However, many admit that early retirement is unrealistic, with 67 being the average at which respondents think they will have enough money to stop working, coinciding with the rising State Pension age.

Many people are now looking towards a patchwork of savings and assets to fund retirement. While only 17% of people expect to downsize, over one in three (34%) expect to draw on other savings to fund their retirement, and a fifth (20%) expect to at least part-fund their later years by continuing to work. In addition, 14% hope to use inherited money or property.

Complexities around optimal financial planning

Despite the complexities around optimal financial planning for retirement, 52% of people do not seek advice regarding retirement and do not plan to. This number increases to 70% for retirees, which may be why one in ten (10%) of them still don’t know how they will fund their retirement.

Pensions have long been seen as the foundation of retirement saving, but many people now recognise that they will need to draw on other available assets to finance their retirement. The answer used to be to ‘buy an annuity’. Whilst annuities still have a place as one of the few ways to guarantee an income, they are expensive. A successful retirement plan involves making the most of not just your pension, but all your savings, other investments and assets.

Want to discuss your options?

Clearly, there is a lot to consider, and making the wrong retirement decisions can be costly. Many people approach retirement with little or no idea how much money they will need or the best way to take an income. Obtaining professional financial advice in the lead-up to and at retirement is essential. We use Financial Modelling Software to help you understand how your retirement can be funded, so please do contact us if you would like to discuss your requirements.

Source data

[1] Research conducted by Opinium Research amongst 5,000 UK adults between 30 August and 5 September 2018.

[2] Full State Pension 2018, https://www.gov.uk/new-state-pension/what-youll-get

[3] This assumes a 4% p.a. growth rate with dividends re-invested net of charges and no Capital Gains Tax to pay on the property sale.

 

 

Safeguarding your wealth for future generations

Unforeseen life events and circumstances can potentially impact your finances in several ways. We can help you to safeguard your wealth for future generations. But for many of us, there can be a remarkable gap between our intentions and our actions.

Inheritance Tax (IHT) affects thousands of families every year. It comes at a time of loss and mourning and can have an impact on families with even quite modest assets – if you thought IHT was just for extremely wealthy people to worry about, think again.

Tackling IHT sooner rather than later

There are legitimate ways to mitigate against IHT, which is why it is sometimes called the ‘voluntary tax’. Unfortunately, some of the most valuable exemptions must be used seven years before your death to be fully effective, so it makes sense to consider ways to tackle IHT sooner rather than later and to seek professional financial advice.

As property prices make IHT a reality for many in the UK, we’ve looked at a few ways to prevent HM Revenue and Customs being one of the largest beneficiaries of your estate. IHT is levied at a fixed rate of 40% on all assets worth more than £325,000 per person (0% under this amount) – or £650,000 per couple if other exemptions cannot be applied.

Parents and grandparents who are passing on their home will be able to leave up to £950,000 to their children without them having to pay IHT.  This figure will rise to £1 million by 2020. The current allowance of £325,000 remains unchanged, but a new tax-free band worth £175,000 per person on your main residence will be added to the £325,000, making it £500,000 per person. The new tax-free band was set at £125,000 in 2018, eventually rising to £175,000 in 2020.

Steps to mitigate against IHT

  1. Make a Will

Dying intestate (without a Will) means that you may not be making the most of the IHT exemption that exists if you wish your estate to pass to your spouse or registered civil partner. For example, if you don’t make a Will, then relatives other than your spouse or registered civil partner may be entitled to a share of your estate – and this might trigger an IHT liability.

  1. Make lifetime gifts

Gifts made more than seven years before the donor dies to an individual or to a bare trust are free of IHT. So, if appropriate, it could be wise to pass on some of your wealth while you are still alive. This may reduce the value of your estate when it is assessed for IHT purposes, and there is no limit on the sums you can pass on. You can gift as much as you wish, and this is known as a ‘Potentially Exempt Transfer’ (PET).

However, there is a catch: if you live for seven years after making such a gift, then it will be exempt from IHT. But should you be unfortunate enough to die within seven years, it will still be counted as part of your estate if it is above the annual gift allowance. You need to be particularly careful if you are giving away your home to your children with conditions attached to it, or if you give it away but continue to benefit from it. This is known as a ‘Gift with Reservation of Benefit’.

  1. Leave a proportion to charity

Being generous to your favourite charity can reduce your tax bill. If you leave at least 10% of your net estate to a charity or number of charities, then your IHT liability on the taxable portion of the estate is reduced to 36% rather than 40%.

  1. Set up a trust

Family trusts can be useful as a way of reducing IHT, making provision for your children and spouse, and potentially protecting family businesses. Trusts enable the donor to control who benefits (the beneficiaries) and under what circumstances, sometimes long after the donor’s death. Compare this with making a direct gift (for example, to a child), which offers no control to the donor once given. When you set up a trust, it is a legal arrangement, and you will need to appoint ‘trustees’ who are responsible for holding and managing the assets. Trustees have a responsibility to manage the trust on behalf of and in the best interest of the beneficiaries, in accordance with the trust terms. The terms will be set out in a legal document called ‘the trust deed’.

Types of trust

There are now three main types of trust.

Bare (Absolute) trusts – with a bare trust, you name the beneficiaries at outset and these can’t be changed. The assets, both income and capital, are immediately owned and can be taken by the beneficiary at age 18 (16 in Scotland).

Interest in possession trusts – with this type of trust, the beneficiaries have a right to all the income from the trust, but not necessarily the capital. Sometimes, a different beneficiary will get the capital – say, on the death of the income beneficiary. They’re often set up under the terms of a Will to allow a spouse to benefit from the income during their lifetime but with the capital being owned by their children. The capital is distributed on the remaining parent’s death.

Discretionary trusts – here, the trustees decide what happens to the income and capital throughout the lifetime of the trust and how it is paid out. There is usually a wide range of beneficiaries, but no specific beneficiary has the right to income from the trust.

Some trusts will now have to pay an IHT charge when they are set up, at ten-yearly intervals and even when assets are distributed.

The sooner you start planning, the more you can do

We can work with you to ensure you make use of all the reliefs and exemptions you can. We can build a tailor-made succession plan based on your individual circumstances to make sure the allowances work best for you. We can give you the peace of mind of knowing that you have laid the firmest foundations for your family’s future. Please contact us to discuss your situation.

Warnings

This article is distributed for educational purposes only and must not be considered to be advice.  The information is based upon our current understanding of taxation legislation and regulations.  Any levels and bases of, and reliefs from, taxation are subject to change.  Errors and omissions excepted. 

 

How to make a good decision when life throws you a tough choice

No matter how thorough our planning is, life inevitably tosses curveballs at us. Often these challenging moments are linked to major life transitions that affect our families, our careers, and our money. Balancing these variables can make arriving at the best decision that much more complicated.

Snap decisions are usually the least effective in the long run. Instead, take a deep breath, and let these decision-making strategies lead you towards the best possible outcome.

  1. Discuss the decision openly and honestly with your spouse

The harder the decision, the more serious it probably is, especially if it involves your family finances. Hiding problems from your spouse almost always makes a difficult situation even harder. If this is truly a fork in the road moment, both of you should be on the same page. Your spouse’s perspective might be just the thing you need to make sure you’re making the right choice for the right reasons.

  1. Consider how this decision aligns with your values

You might think of this as the “mirror test.” If you make this choice, are you going to be able to look yourself in the mirror tomorrow? If not, you might be leaning towards a decision that’s at odds with what’s really important to you.

Think about the reasons for this disconnect. Are you considering the easier of two possible choices? Living by your values isn’t always easy in the moment, but that face in the mirror is going to be looking back at you for the rest of your life.

  1. Identify an objective

Sometimes we don’t understand our true reasons for the choices we make until we dig a little deeper. “Why?” can be a simple but very powerful question, especially if you keep asking it.

For example, why do you want to buy a bigger house?

Because we need more space.

Why do you need more space?

Because I don’t have room for a home cinema.

Why do you need a home cinema?

Because my job is too stressful, and I need to destress.

Turns out your housing decision isn’t really about your house. It’s about work and a bigger TV isn’t going to make your job any less stressful.

  1. Think about everyone involved

Step outside of yourself and think about the other people who are going to be affected by your choice. Your spouse, your children, your friends, your colleagues, your neighbours. What’s best for you right now, might not be what’s best for the people closest to you. Is this decision going to damage any relationships that are important to you? Is that damage worth it?

  1. Are past experiences influencing this decision? For better? For worse?

Our decision-making can sometimes feel like it’s automatic. We make choices without ever really thinking about why we made that choice. We might say after the event that we were “going on instinct” or “listening to our gut feelings.”

But the way we respond to major choices is often a result of our past experiences. For example, your attitudes about an investment decision or high value purchase might be heavily influenced by how you saw your parents handle their money when you were a child. You might continue to work a safe but unfulfilling job because that’s what your father did to provide for you.

Think about whether your experiences are helping you make a good choice or reinforcing some bad habits.

  1. Consider seeking professional advice

It can be difficult to admit when we need help. But pros are pros for a reason. There are probably plenty of people who have benefitted from your professional expertise over the years. Don’t be too proud or too embarrassed to contact a solicitor, doctor, counsellor, contractor, or tax expert if you need the best possible advice.

And if your decision will occur at a major intersection of your life and your money, we want to be at the top of your call list. Come in and talk to us about how this choice could affect your Financial Plan, and how we can help.

A ‘set-and-forget’ investment approach? Forget it!

Systematic, evidence-based investing often results in very little activity in a portfolio. It is wrong to think that this is the result of a ‘set-and-forget’ strategy. The Firm’s Investment Committee would be aggrieved at such a suggestion! Considerable effort goes on behind the scenes to allow this state of calm consistency to exist. The fortitude and discipline to deliver ‘not much needs to be done to your portfolio except for rebalancing’ advice, comes from a rigorous process of ongoing challenge to the status quo.

The broad terms of reference of the Investment Committee are set out below:

Manage risks over time
The Investment Committee is responsible for the oversight of the risk in portfolios and the wider investment process. Meetings are regular and minutes are taken, which include all action points to be followed up on. Third-party inputs and guest members – such as Albion(our strategic analysts) – provide independent insight and challenge.

Challenge the process
The investment process at the Firm is driven by the latest empirical evidence and theory available. It is always open to challenge. If new evidence suggests that doing things differently would be in our clients’ best interests, then we will revise our approach. The investment process is evolutionary, but change is most likely to be slow and incremental.

Review the portfolio structure
The underlying characteristics of the Firm’s client portfolios are reviewed, including performance and risk level attributes. Risks (asset class exposures) and their allocations within a portfolio are evaluated. Any issues are raised and resolved. Existing asset classes are reviewed alongside asset classes and risk factors that currently sit outside the portfolios. Areas of interest are placed on a longer-term ‘watch’ list.

Review the incumbent ‘best-in-class’ investment products
The incumbent products are ‘best-in-class’ choices seeking to deliver the returns due to investors for taking specific market risks. Each product has a role to play in a portfolio and its ability to deliver against this objective is regularly reviewed. Any product-related issues are raised and resolved.

Screen for new products and undertake appropriate due diligence
Although the incumbent products were recommended as ‘best-in-class’, new products are regularly being launched. Tough screening criteria are in place against which new funds are judged. New, potential ‘best-in-class’ products face detailed due diligence and approval. They are included only when they make the grade. Given the quality of the products already in portfolios, the threshold for replacement is high, but not insurmountable for newer products.

Reaffirm or revise the investment process
The Investment Committee is accountable for reaffirming or revising the structure of client portfolios. Risk (asset) allocations and product changes are approved by the Investment Committee. Any actions arising from portfolio revisions will be undertaken, after discussion with and agreement by clients.

So, the next time you open your latest review report, remember that despite the lack of activity on the surface, the Investment Committee continues to paddle furiously behind the scenes to allow this be the case. In the immortal words of the investment legend and author Charles Ellis:

‘In investing, activity is almost always in surplus.’

Perhaps we should amend this slightly to:

‘In investing, activity is – except for the Investment Committee –almost always in surplus.’

Risk warnings
This article is distributed for educational purposes only and must not be considered to be investment advice or an offer of any security for sale. The reference to any products is made only to make educational points and must, in no circumstances, be deemed to be any form of product recommendation.
This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
Past performance is not indicative of future results and no representation is made that the stated results will be replicated.
Errors and omissions excepted.