Newsletter – October 2016

HMRC have signalled that they plan to ramp up penalties for offshore tax evaders as there seem to be more and more cases of tax evasion reported throughout the media. 

From October this year, HMRC will collect more data from places such as the Isle of Man, Guernsey, Jersey and other overseas territories where investors may hold their investments. Fines of up to three times the amount of tax originally due will be imposed as a deterrent to those considering evasion methods.

People have been given a reprieve and have been told to “fess up” and pay the tax they owe before they are caught and slapped with hefty fines, and HMRC seem determined to catch the evaders out.

Perhaps those who evade paying their tax don’t realise the strain it puts on other tax payers, the vast majority of whom will pay their tax in full and on time. Hopefully this is the start of the end for tax evasion and HMRC will stick to their word about tougher sanctions and, in doing so, make tax evasion sufficiently unappealing to wipe it out completely.

How often do you pause to think about your pension plan? Are you saving enough for a comfortable retirement, or will your standard of living fall? Are you missing out on valuable tax relief on pension contributions? These are mistakes you should avoid at all costs.

Thinking you’ll get by on your state pension

Although the basic state pension has increased to £155.65, not everyone will get this amount as it will depend on their contribution record. Getting a pension forecast from gov.uk will show you what you are likely to receive. The state retirement age is set to increase too, so if you were born after 6 April 1978 you won’t be entitled to receive your state pension until you’re 68 years old. You don’t have to be a maths genius to see that the basic state pension won’t amount to much more than £8,000 a year, falling well short of the UK average wage of £27,600.

Not joining a workplace scheme

By 2018, all UK companies will be required by law to offer a pension scheme. Joining is simple and means you will have an additional source of income in retirement. Employers pay into the scheme on behalf of their staff, provided they don’t opt out, and employees receive tax relief on their contributions.

Believing you can just keep working

Many people put off making proper plans on the basis that they’ll never give up work. This is a dangerous assumption. Physically, we all age at different rates and you may not feel fit enough to continue into old age.

Banking on a windfall

Whilst some people will receive money from their families, figures from the Prudential¹ indicate that just 28% of people retiring this year believe they will have money spare to leave to loved ones on their death. With life expectancy steadily increasing and the cost of care continuing to rise year on year, hoping for an inheritance from the older generation shouldn’t be a substitute for proper pension planning.

Selling a business or property

Relying on your home or business to provide money when you want to retire poses a number of problems. Finding a buyer might prove difficult as markets can go up and down. If you plan to sell your home to raise funds, you will have to find a suitable property to live in, and there will be costs associated with the sale and purchase.

Pension planning can seem complicated, but taking professional advice and regularly reviewing the progress of your plan with your Polestar adviser can mean the difference between enduring and enjoying your retirement years.

1 Prudential, 2016

Retirement presents a series of opportunities and challenges; a primary concern for many people is ensuring they don’t run out of money. A sustainable, well-structured retirement income strategy is therefore desirable for any retiree.

To enjoy a comfortable old age means doing some in-depth thinking well in advance, asking yourself what your goals are and how much money you want to have at your disposal. Other prime considerations should be – will I be able to maintain my lifestyle? Do I want to leave an inheritance? How might my financial circumstances change? Will I run the risk of outliving my retirement pot?

So how should you approach creating a robust financial plan?

A hierarchy for retirement income

Many people find it helpful to think in terms of Maslow’s famous Hierarchy of Needs. His pyramid contained different levels of need that human motivations move through, starting with the physical requirements for human survival and ending with mankind’s highest aspirations. Using this hierarchical approach in a personal finance context was pioneered by money guru Mitch Anthony, who employs it as a useful aid in deciding how to plan your income in retirement.

Survival Income

At the base of the pyramid, survival income comprises the income you need to pay all your basic day to day household expenses. It involves drawing up a budget to cover your regular bills and running costs.

Safety Income

The next layer up, safety income is the amount you might need to meet life’s unexpected events. This could include health and later-life care costs and any emergency financial help you might want to give your family.

Freedom Income

This layer involves assessing the likely cost of doing all those things that you maybe never had time to do prior to retirement. This would include holidays, major purchases or other indulgences.

The pinnacle of the pyramid

Many people add a gift layer representing money they want to pass onto children and grandchildren during their lifetime. Some add a dream layer, their ultimate ‘bucket list’, to the very top.

By viewing your finances in this way, you can gain a clear picture of how much you need to have saved by the time you reach retirement.

By working with your adviser, you can decide how much income you would like to meet your needs for various stages of your life, taking into account your personal and financial circumstances, lifestyle goals, attitude to risk and capacity for loss. Your Polestar adviser will be able to recommend the right mix of assets to help you achieve  your goals.

Whilst many more couples now share the household chores, it’s increasingly women who make the financial decisions for the household, such as choice of utility company or savings account. Survey results from market researcher Mintel¹ show that 84% of mums surveyed say they have influence when it comes to taking financial decisions on behalf of their family.

Women, the research found, know that they need to do their homework before taking any major financial decision, and are prepared to do their research thoroughly. Once they know more, they will instigate the decision-making process with their partner as a joint endeavour.

Retirement and pensions

By contrast, when it comes to retirement planning, evidence from an attitudinal survey carried out by the Department for Work and Pensions² shows that couples perceive pensions as being an individual rather than a joint financial decision.

A report by Scottish Widows³ shows that women are still lagging behind their male counterparts when it comes to making provision for their old age. Although there is evidence that women in their 20s are beginning to think more seriously about pensions, by their 30s, just 31% of women think they are saving enough for retirement, compared to 48% of men. Researchers see this as being due in part to the gender pay gap that still exists in many quarters, coupled with the high childcare costs often shouldered by women.

When Andy Haldane, the Bank of England’s Chief Economist, said recently that he found pensions impossible to understand he was, it seems, speaking on behalf of many. In the Scottish Widows survey, 71% of women admitted that they didn’t know how much they needed to save for retirement, compared with 52% of men.

If you’re making plans for your financial future and would like some straightforward savings or pensions advice, then please get in touch. 

1 Mintel, Mum’s both queen and king of the household as she leads purchasing decisions across all categories, 2016

2 Department for Work and Pensions, Household financial decision making, 2012

3 Scottish Widows, Women and Retirement Report, 2015

According to research from investment company Franklin Templeton¹, only 36% of people with more than £250,000 saved for their retirement, select to take advice from a financial adviser.

In the survey of over 2,000 UK adults, more than a quarter do not have a retirement income plan and 70% of those say that it is informal and primarily exists in their head.

With such a significant number of those approaching retirement having little or no plan in place, UK Country Head at Franklin Templeton, Ian Wilkins commented, “These findings are concerning on a number of levels, but most worrying is the fact that so few people have given any considered thought to a retirement plan.

“While most people undoubtedly put time and effort into seeking advice and a clear plan over their mortgage or insurance arrangements, it seems that retirement planning is falling by the wayside for a disturbingly large number of people.”