Many people overestimate how much they spend on retirement

Many people overestimate how much they’ll need to live on in retirement, thinking that they’ll spend the equivalent of their wages.

 Another common perception is that you’ll need between half and two-thirds of the final salary you had when you were working, after tax, to maintain your lifestyle once you retire. This assumes however that the mortgage has been repaid, you are no longer bringing up children and of course you won’t face the cost of commuting once you’ve retired.

Which magazine conducted a survey in April 2022 to help figure out how much individuals need in retirement. Households with two people spent a shade under £2,340 a month, or around £28,000 a year, on average to be ‘comfortable’. This covers all the basic areas of expenditure (which had a combined cost of £19,000 per year on average) and some luxuries, such as European holidays, hobbies and eating out. Aiming for this level of income will provide a good platform for your retirement. You’d need £45,000 a year if you include luxuries such as long-haul trips and a new car every five years. Travelling and holidays are a very important part of retirement, with people spending on average £4,657 a year on this part of their life.

 “61% of under 65-year-olds have no idea what their retirement income will be. ”

 Priorities change slightly as you move through your retirement years. People tend to spend relatively less on food and drink, housing payments and recreation as they get older, particularly over the age of 80, but more on utility bills, health, and insurance premiums.

Since the research individuals would have undoubtedly spent more on energy, food and petrol.

By Philip Harper  |  June 2023

Using Business Property Relief (BPR) to help provide relief from inheritance tax

It allows certain investments to be left to your beneficiaries free from inheritance tax.

BPR was introduced in the 1976 Finance Act.  It was created to allow small businesses to be passed down through generations without facing a large inheritance tax bill.

Over time, successive governments have recognised that tax breaks are the best way to encourage people to invest in trading businesses, regardless of whether they run them themselves. These incentives can compensate for some of the risks associated with investing in such companies.

Why hold shares in BPR-qualifying companies?

• Faster inheritance tax exemption: Whereas making a gift means they take seven years before becoming exempt from IHT, investments in a BPR company are exempt after being held for just two years, provided the shares are held at the time of death.
• Greater access and control: Unlike a gift, the investor retains control over the investment and can sell it if they need to. Money taken out of the investment however will no longer be exempt from inheritance tax.
• Simplicity: Buying a BPR investment is relatively simple compared to setting up a trust as there are no complex legal structures.

What are the risks?
The value of a BPR investment will depend on the performance of the companies it invests in and you may get back less than you invest. Tax rules can change and investments in AIM-listed companies are likely to fall or rise more than shares on the Stock Exchange. There are however more products being introduced which focus on capital preservation and are primarily linked to the returns associated with renewable energy.

Choosing the right investment can be complicated which is why it is vital to seek advice from an independent adviser.

By Philip Harper  |  June 2023

Is it wise to hold individual shares?

A question we are often asked by clients is “Should we keep our share portfolio?”

 In the 1960’s and 70’s it was quite common to buy a basket of blue-chip shares, sit back and enjoy some consistent growth and useful dividends and these portfolios were often passed down through generations. Sadly, the phrase ‘blue-chip’ share is all but gone, with virtually all shares globally seem subject to increased volatility. Even the solid names like BP, M&S, Rolls Royce and Lloyds Bank have had their well-publicised crisis points.

Many employed clients might have the option to purchase their company’s shares at a discount and this can provide some excellent opportunities. One risk to consider however is under-diversification – it’s never smart to put too many of your eggs into one basket. When you invest in the company where you work, your finances are doubly exposed. In the event your employer falters, not only might your investments tumble, but you might also find yourself out of work at the same time. Just ask former employees of Enron and very recently, Credit Suisse, who watched shares in their company plummet, while facing job uncertainty.

Our preference is to encourage clients to ‘manage out’ their shares and this is a method of swapping shares for funds, which we believe are far more appropriate and where the control of risk can be introduced. We may need to manage the process over a number of tax years if Capital Gains Tax is a consideration, but the long-term result is often highly beneficial.

By Philip Harper  |  April 2023

Act now to boost your State Pension?

You have until the 5th April 2025 to fill in missing national insurance contributions, which could make a difference to your retirement.

Normally, you can fill in gaps going back six years, but until the 5th April 2025, those who reached or will reach state pension age after April 2016 can fill in gaps dating back to 2006-07, meaning that you can make up for a total of 16 years of missed contributions.

The official retirement age
You receive your state pension when you reach the Government’s official retirement age. When this is will depend on when you were born. It is increasing to 67 for men and women by April 2029, with a further rise to 68 expected between 2037 and 2039. Although recently there has been discussion about bringing this forward to save money.

Buy ‘extra’ pension years
If you’ve had a career break, a low income or worked abroad, you may not have paid national insurance. new state pension rules, you need 35 qualifying years for a full rate pay-out. If you’ve spare savings, it’s possible to replace some missing NI qualifying years. This could lead to a significant increase in your basic state pension pay-out over your retirement. In a nutshell, you pay a one-off lump sum to buy a higher state pension sum. Assuming you live long enough, the extra cash you earn from a higher weekly state pension could be worth £1,000s over a lifetime. However, they need to be considered carefully.

 How to check that you are on track

1. Request a state pension forecast from gov.uk to see how much you are on track to receive and at what age you will get it. It should also advise you if there is anything you can to do to increase the amount.
2. Call the Future Pension Service helpline on 0800 731 0175 to make sure filling in gaps in your national insurance record will boost your pension. It is worth double-checking – as always with pensions – there are some tricky rules!
3. If you top up your national insurance contributions by paying HMRC online or by cheque or bank transfer, include your national insurance number as a reference. For help, call the national insurance helpline on 0300 200 3500.

To determine whether it’s worthwhile, see how many NI years you already have. If gov.uk shows you’ll receive £185.15 per week, then this is a full pension, and you don’t need to do anything.

Is it worth it?
The rate is £15.85 per missing week of NI contributions – £824.20 for a full year. Paying £8,242 to make up a ten-year gap could give you an additional £2,750 a year – this would be worth £55,000 extra over a 20-year retirement without taking inflation into account. So, if you live at least four years after retiring you’ll earn back what you paid, which is an investment return very hard to find elsewhere!

By Philip Harper  |  February 2023

How to recognise a financial scam

UK fraud prevention groups are warning individuals to be extra vigilant in the run up to Christmas and New Year sales. As these scams increase in sophistication, we are all vulnerable. Fraudsters can be articulate and financially knowledgeable, with credible websites, testimonials and materials that are hard to distinguish from the real thing.

The Financial Conduct Authority (FCA) reminds consumers that like anything valuable, your pension or investments can become the target for illegal activities, scams, or inappropriate investments. Scams can take many forms and often appear to be a legitimate investment opportunity. Use the FCA’s Scam Smart to check investments and pensions.

We have pulled together a list of tips on how best to recognise and avoid a financial scam.

• Stop and check the domain name of the sender’s email address. Fraudsters draw you in with an email that looks remarkably legitimate, so a close match but with something slightly off. Think @amaz0n.co.uk. If you are still unsure, it is good practice to go to the website directly rather than click on any links in the email.
• Do not click on links or open emails from senders you do not know.
• Be wary of special offers and deals that sound too good to be true. Avoid the pressure to act quickly.
• Avoid shopping on public Wi-Fi networks such as the railway station. They rarely have the safety protocols such as passwords in place, so easier for hackers to piggyback and steal unsecured banking details without you knowing.
• Be careful of fake websites designed to look identical to an official one. Every website should have a valid security certificate and you can tell by the little padlock icon next to the URL. If the website doesn’t have one, don’t give any personal details.
• Apple Pay and Google Pay are good payment options as they protect your bank details.
• Keep an eye on your bank account and if you see anything unusual get in touch with them.
• If you think any of your online accounts have been compromised, change the password, and try to have a unique password for each retailer.
• Another classic is a text message suggesting you have a parcel waiting with DHL, Royal Mail or some other delivery provider. A good indicator that something is amiss is if the text asks you for payment and includes a bit.ly link. Do not click on these.
• Investment opportunities found through search engines are not necessarily authorised or regulated by the FCA.
• Always check who you are dealing with before changing your pension arrangements or transferring money to another account.
• Take time to make checks and seek financial guidance.
• The FCA helpline is 0800 111 6768 and all investment and pension providers should be registered. Financial Management is registered as Philip Harper LLP and everyone should have a unique number – ours is 485423. Search for the FCA page via Google, do not click on a link within an email.
• If you get cold-called, the safest thing to do is to hang up. If you receive unexpected offers by email or text, it’s best to simply ignore them. You can register with the Telephone Preference Service and Mailing Preference Service to reduce the number of letters and cold calls you receive. Callers may pretend they aren’t cold calling you by referring to a brochure or an email they sent you that’s why it’s important you know how to spot the other warning signs.

 We are here to help If you are unsure about any financial approaches, please contact us first.

By Philip Harper  |  November 2022

Your retirement journey starts right now!

There was a time when retirement seemed to take care of itself. It was normal to work, retire and then receive the state pension plus a company pension scheme. For most people now, this route simply doesn’t exist. Saving for a “pension” can mean a multitude of different things and the way your savings are organised can make a big difference to whether or not you are able to do what you planned in your life, and also how your money is treated once you die.

 The 2015 changes to the “at retirement” rules vastly increased flexibility and brings with it a new era of personal responsibility in retirement.

 Working beyond state pension age is no longer an exception and it is becoming increasingly common to consider downsizing or releasing equity in their home as a part of their retirement planning.

Far more choices will have to be made and the answers themselves become less obvious. How do you best invest your savings? How do you want to take income in the future and what happens to your assets when you die?

The new normal requires a plan. Having a plan not only helps you understand what you are aiming for, but regularly reviewing that plan enables you to check you are on track.

By Philip Harper  |  October 2022