Greater clarity on how much care in ‘old age’ may cost

Cap provides long-term savers with a greater idea of future spending

In his Budget speech delivered in March, the Chancellor, Mr Osborne, said this was a Budget for ‘an aspiration nation’. He explained this meant ‘helping those who want to keep their home instead of having to sell it to pay for the costs of social care.’ The confirmation of a £72,000 cap on social care costs provides long-term savers with a greater idea of future spending, but doesn’t cover additional costs incurred in a residential care home.

Cost of care
Savers who were hoping that the Budget 2013 announcement around social care would provide greater clarity on how much their ‘old age’ may cost them could be disappointed to find out that they will still have to foot the bill for uncapped ‘hotel costs’ incurred in a care home, such as food and board.

Means testing limit
Despite an increase in the means testing limit covering total care costs (social care and ‘hotel costs’) to £118,000, many whose estate is worth more than the limit will have to pay for the bill themselves. This means the majority of home owners will still find themselves in the uncertain position of not knowing how much their old age will cost.

High care home fees
People may be surprised that the social care cap does not cover their total care bill. This will result in many pensioners and elderly people having to prepare for high care home fees. Some may even find themselves in the unfortunate position of having to sell their assets to fund their old age. It is important for those who find themselves near or over the means testing threshold to prepare for the financial burden that may be placed upon them to avoid undesired consequences.

Will you be left to pick up the pieces?
The future of social care is one of the most important issues facing the country. All too often the NHS and families are left to pick up the pieces when older people fail in their struggle to cope alone. If you are concerned about how this could impact on you or a family member, please contact us to review your requirements.

Flexible drawdown rules untouched by Budget 2013

Greater opportunities for those with over £20,000 pension income

The eligibility rules for flexible income drawdown from pensions were untouched by Budget 2013, which is welcome news if this is something you are considering or would like to find out more about. Flexible income drawdown is a type of income withdrawal where you can take pension income direct from your pension fund without having to purchase an annuity. Ordinarily, there are limits on the maximum income you can take under income withdrawal (known as ‘capped drawdown’).

Provided you have a secured pension income of over £20,000 ‘Minimum Income Requirement’ a year (which can include any State pension), you could be eligible to use flexible income drawdown in respect of your money purchase pension savings.

Amount of income
Under flexible income drawdown there is no limit on the amount of income you can take in any year. You can tailor your drawdown pension to suit your personal requirements, whether taking regular amounts at a set frequency or ad hoc income when required. There is even the option to draw the entire fund in one go. All income withdrawal payments are subject to income tax under PAYE at your appropriate marginal rate.

Tax-efficient
Flexible income drawdown is tax-efficient, particularly where you wish to ‘phase in’ the use of your pension savings to provide that income. Any money left in drawdown on death is subject to a 55 per cent tax charge, whereas any untouched pension fund money (pre age 75) can pass on to your beneficiaries free of tax.

Once you go into flexible income drawdown you can no longer make tax-efficient pension contributions, so you should look to maximise all allowances, including carry forward, this tax year.

Flexible income drawdown is a complex area. If you are at all uncertain about its suitability for your circumstances we strongly suggest you seek professional financial advice. This is a high-risk option which is not suitable for everyone. If the market moves against you, capital and income will fall. High withdrawals will also deplete the fund, particularly leaving you short on income later in retirement.

At a time when people are being squeezed by the taxman, anything that helps save tax should be considered, and the potential to avoid the 55 per cent tax charge on part of those savings on death could result in significantly more of their estate being passed on to beneficiaries.

Flexible income drawdown is a complex area. If you are at all uncertain about its suitability for your circumstances you should seek professional financial advice. Your income is not secure. Flexible income drawdown can only be taken once you have finished saving into pensions. You control and must review where your pension is invested, and how much income you draw. Poor investment performance and excessive income withdrawals can deplete the fund.

‘I wish I’d started saving for retirement earlier’

New research shows why many older UK adults have many money regrets

Research from Standard Life has found that UK adults have many money regrets. But when asked what one thing, if anything, they most wish they had started doing earlier to be financially efficient with their money, saving for retirement came top of the list. Nearly one in seven (15 per cent) UK adults said they wish they’d started saving for their retirement when they were younger.

Today’s baby boomers
And if you ask those aged 55 plus, today’s baby boomers, then an even higher number – one in five – say this is their biggest regret. This figure rises further among adults who are saving into a personal pension rather than being part of a workplace scheme, with a quarter (25 per cent) wishing they’d started saving earlier, compared to just 13 per cent of those saving into a workplace pension.

Impact on future finances
Hindsight is a wonderful thing, but we can all learn from those who are older and wiser. The earlier we start saving, the bigger the impact on our future finances. Someone who starts saving £100 a month at age 25 could receive an income of £3,570 per annum by the time they are 65. Using the same assumptions, someone saving the same amount from age 40 would have a pension income of only £2,000 per annum at the same age [1].

Important not to panic
For those of you who feel you’ve already left it too late, the important thing is not to panic and save what you can now. And those of you who are not already saving through a workplace scheme or about to be automatically enrolled into one should find out more about personal pensions if you don’t want to end up with the same regrets as many other personal pension savers. These days most personal pensions are really flexible, so you can increase, decrease or stop and start contributions to suit changes in the future.

The challenge of saving efficiently
It’s important to take advantage of whatever opportunities you have to increase your pension contributions. Remember, with pension plans, the government contributes whenever you do. So if you are a basic rate tax payer, in most cases for every £4 you save in a pension, the Government adds another £1. And if you’re in a workplace scheme, your employer is likely to be topping up your contributions too. So consider increasing your regular pension savings as and when you can; or pay in a lump sum after a windfall such as a bonus [2].

Don’t think it’s ever too late to start saving for your retirement. And if you’re younger, don’t think that because you can’t save very much, there’s no point bothering. Even if you can start to save a small amount from a young age it can make a difference.

If you don’t feel you can put your money away in a pension just now, then you might want to consider investing in a tax-efficient Stocks & Shares Individual Savings Account (ISA) instead. This means you can still access your investment, while you also have the potential to help your money grow. There is no personal liability to tax on anything you receive from your Stocks & Shares ISA, so you might want to think about using as much of your £11,520 ISA allowance as possible before the end of this tax year. You can invest up to half of this in a tax-efficient Cash ISA, which you can earmark for more immediate concerns. Then you may want to consider
investing the rest in a Stocks & Shares ISA so you have the potential of greater tax-efficient growth over the longer term [2]. ν

All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 2,059 adults. Fieldwork was undertaken between 25 – 28 January 2013. The survey was carried out online. The figures have been weighted and are representative of all UK adults (aged 18+).

[1] All pension figures are sourced from Standard Life and are based on an individual retiring at 65, making monthly pension contributions, assuming a growth rate of 5 per cent per annum, inflation of 2.5 per cent per annum, an annual increase in contributions of 3 per cent and an annual management charge of 1 per cent. The income produced is based on an annuity that does not increase, paid monthly from age 65, and this will continue to be paid for the first five years even if the individual dies.

[2] Laws and tax rules may change in the future. The information here is based on our understanding in April 2013. Personal circumstances also have an impact on tax treatment. All figures relate to the 2013/14 tax year, unless otherwise stated.

You’ve worked hard for this; now’s the time to enjoy it

Start your retirement by celebrating your newfound freedom

Some pensions allow you to switch your money into lower risk investments as you near retirement date, which can help to protect you from last-minute drops in the stock market. However, doing this may reduce the potential for your fund to grow, plus your fund cannot be guaranteed because annual charges may reduce it.

Obtain an up-to-date pension forecast
With only months to go before you start accessing your pension, it’s important to get a very clear view of the level of income you can expect to receive. Contact your pension provider or providers for an up-to-the-minute forecast of your tax-free lump sum and income. You should also request a State Pension forecast, which will come complete with details of your basic State Pension and any additional State Pension you will receive. In addition, find out when you’ll be eligible to take your State Pension in the light of changes to the State Pension Age.

Also think about other sources of income you might be likely to get when you retire. These could include income from investments, property or land, part-time employment or consultancy, or an inheritance. Having as full a picture as possible will enable you to make detailed and practical final decisions about exactly how you want to take your pension income, as well as allowing you to make more accurate plans for your new lifestyle.

Choose how to take your pension
Although you may already have given some thought to how you want to take your pension benefits, it’s worth reviewing your plans at this point. Circumstances can change – for example, you might have received a significant inheritance or you may have been diagnosed with a medical condition, and former plans may no longer be quite appropriate.

You can either take your pension as an annuity, as income drawdown or as a combination of the two. With any of these options, normally you’ll also be able to take up to 25 per cent of your fund as a tax-free lump sum.

Additionally, now that the compulsory maximum annuity age no longer applies, you can decide to defer taking your pension. By keeping your pension pot invested there is an opportunity for further growth. However, you should think about the risks involved and look to de-risk as much as possible at this point. Investments can go down as well as up and your pot will be affected by the ups and downs of the markets. There can also be tax benefits but, as this is a complex decision, you should obtain professional financial advice – and remember, you may get back less than you invest.

Tax matters
Most people pay less tax when they retire, but it’s worth considering your tax position at this stage. Although you can normally take up to 25 per cent of your pension fund tax-free, any income you receive from it will be subject to tax under the Pay As You Earn (PAYE) system.

Meanwhile, if you’ve taken the option of income drawdown, you may be able to adjust the income you take to minimise the tax you pay. For example, if you plan to do some consultancy work or continue working in a part-time capacity, you could think about reducing your income withdrawals to stay within the basic rate of tax. Bear in mind that tax regulations can change and tax benefits depend on your personal circumstances.

Additionally, keep your savings and investments as tax-efficient as possible with products such as Individual Savings Accounts (ISAs) and offshore bonds.

You’ll also stop paying National Insurance contributions when you reach State Pension age. If you decide to continue working, whether full-time, part-time or on a consultancy basis, it’s a good idea to contact the tax office to make sure contributions aren’t still being deducted.

Prepare for life after work
As well as sorting out your finances, don’t forget to think about how your life will change when you retire. Even if you intend to keep working part-time, you’re going to have much more free time to enjoy.

Planning these first few months will help you set the tone for your future. Perhaps there’s somewhere, or someone, you’ve always wanted to visit. Maybe you want to learn a new sport or leisure activity, but have always had too many commitments. You might even want to start the search for that perfect retirement bolthole. The financial planning you’ve been doing for years all starts to bear fruit now.

Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor.

New higher flat-rate state pension

One of the biggest overhauls of Britain’s pension system in decades

The Government recently announced that up to 400,000 more Britons will qualify for a new higher flat-rate State Pension and they’ll introduce the reform a year earlier than expected. The simplified scheme will provide a weekly flat-rate payment of £144.

The date has been moved forward to April 2016, and is one of the biggest overhauls of Britain’s pension system in decades. The current system includes a basic pension, a State Second Pension and/or some means tested pension credit. From 2016 this will all be merged into the universal flat-rate payment.