There is a perception that bonds are for “cautious” investors and that equities are for more “aggressive” investors, and that’s partly true. Yet 2020 has cast a spotlight on bonds in light of COVID-19 and other events in the economy (e.g. Governments around the world buying bonds). In this article, our financial planning team at WMM in Oxford wanted to share this round-up of the key developments and trends regarding bonds within the last 12 months. We hope you find this helpful and invite you to get in touch if you have any questions.
This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxford).
Coronavirus has been a particularly stressful time for those looking to retire in the next 10-12 years. Many pensions have lost value since December 2019 as stock markets (which pensions tend to be heavily invested in) have taken a hit from the pandemic, lockdown and the resulting change in consumer behaviour and levels of concern.
Fortunately, equities have been steadily rising again across the developed world since the first quarter of 2020. The other good news is that there is still plenty of time to prepare for retirement for those who may be looking to finish work within 12 years. Below, our Oxford-based financial planning team here at WMM offers a handful of pension options for over-55s. Make sure you seek professional advice before acting on any of the below.
Leave your pension(s) invested
In 2020-21 the UK’s pension rules allow you to start taking money from a defined contribution pension once you reach age 55. You can withdraw up to 25% tax-free, for instance. However, just because you have this choice does not mean you should take it. You could leave the fund invested, allowing it to grow further so that you can enjoy a more comfortable lifestyle when you do eventually retire. However, it may be worth speaking to your financial planner about whether you could invest in lower-cost, better-performing funds to increase your real returns. It can also be wise to re-evaluate your contributions. Increasing them, for instance, could result in more money saved in retirement – allowing your pension(s) to stretch further.
Buy an annuity
In light of the pandemic, many people are attracted to an annuity. This is because it can provide a guaranteed, inflation-linked income throughout retirement. Some will be attracted to the financial stability and predictability this offers. Yet it’s important to consider that you may not get as much future monthly income from an annuity compared to income drawdown. In 2020, moreover, annuity companies have been affected by the pandemic. It may be wise, therefore, to consider ways to spread out your pension risk.
Take everything out at once
Of course, you may be tempted to empty your pension from the age of 55. Yet most financial planners would caution against this, since it’s likely to result in you not having enough money later in retirement. There are only specific circumstances in which this may be wise – e.g. if you have been diagnosed with an illness certain to result in death within the next 12 months.
Transfer your pension(s)
Pensions come in different shapes, types and sizes. Some involve building a pension pot over time with your employer, for instance (i.e. a workplace defined contribution pension). Others, such as final salary pensions, grant you an income in retirement from your employer based on criteria such as your years of service and salary in employment. There are advantages and also disadvantages to each of these pensions, so it may make sense to transfer from the latter to the former in certain cases (e.g. if you want to leave your pension as an inheritance one day). Bear in mind, however, that this is a big decision that cannot be reversed once made. You can also only move from a final salary pension to a defined contribution scheme – not vice versa.
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There are many other options available for over-55s who are thinking about retiring within the next 12 years or so. Above, we’ve outlined an overview of just some of the possible options. The important thing to remember is that your decision(s) regarding your pension is likely to have significant repercussions on when you retire, and what that retirement will look like. As such, it’s always worth considering professional advice to make sure you make the best decision.
Interested in finding out how we can optimise your financial plan and future income prospects? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM.
You can call us on 01869 331469
This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxford).
Chancellor Rishi Sunak was expected to deliver a new Budget in the Autumn, yet this has now been officially called off. Many pundits were speculating a large tax raid – especially upon higher earners – in an attempt to start balancing the books in light of large coronavirus spending earlier in the year. It’s important to note the significance of this delay. Holding a budget in the autumn allows civil servants, accountants and the wider public time to implement large changes to the UK tax regime before the end of the financial year in April.
As such, a budget in the spring of 2020 could leave many people with insufficient time to make adjustments to their financial plan (to optimise their tax position). In light of this, our financial planning team here at WMM in Oxford wish to stress the importance of taking advantage of the existing rules to put your wealth and finances in the best position. Below, we offer some ideas on how to do that for you to discuss with your financial planner.
Plan your estate carefully
There are many misconceptions about inheritance tax (IHT) – which is understandable, since it’s such a complex area. One myth that’s important to bust straight away is the idea that IHT is only payable when you die. Bear in mind that transfers into a trust can also incur a 20% charge when above the available nil rate band. Moreover, be careful not to assume that shares on alternative investments (AIM shares) are exempt from IHT. Check these areas with your financial adviser.
Regarding gifts, the “7-year-rule” is currently still in place during the 2020-21 year. Some are suggesting that this rule could be axed in the coming months (which is possible). Yet it’s crucial to not simply make a gift now in an attempt to leverage the rule before it possibly changes. Bear in mind that taper relief applies on gifts applies at 20% after three years. Unless the gift exceeds your nil rate band (i.e. £325,000) it is unlikely that you will save any IHT.
Also, be careful with ISAs (individual savings accounts). Unlike pensions, these are not exempt from IHT. Assets outside of the UK can also be subject to IHT! Finally, make sure your executors are aware of some of the nuanced IHT rules which might catch you both out. For instance, your unused nil rate band is not automatically transferred to your spouse/civil partner. Rather, this must be claimed by your executors using the relevant forms. Also, remember that executors are personally liable to pay IHT. As such, it’s crucial to make sure they have access to the funds they need to do this in the future.
Other thoughts
A number of measures introduced by the UK government earlier in 2020 are set to expire at some point soon. The Stamp Duty holiday, for example, is currently set to conclude in March 2021. Many landlords with Buy To Let properties are thinking about taking advantage of this window, but should remember that CGT has to be paid much earlier now on residential property sales.
Finally, investors with property investments should consider ways to optimise their tax position in the coming months. For instance, it might make sense to transfer ownership of a property to a spouse/civil partner so that rental income is charged at their lower, marginal rate of tax. Bear in mind that property transfers in 2020 can still be done between members of such couples without a tax charge. This is a decision with important implications, however, so seek advice first.
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Interested in finding out how we can optimise your financial plan? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM.
You can call us on 01869 331469
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