How much do I need to retire?
Q: If you don't have children is there any downside to taking a lifetime mortgage rather than having a home when you die or go into care?
Lifetime mortgages is not an area I / we at Tilney advise on so I’m afraid I can’t offer an expert opinion on that one.
Q: £92,500 per year retirement expenditure seems very high, especially when cars, house maintenance are on top of this. Do you have some example expenditures for different types of lifestyles?
Different examples can be provided yes, although I think sometimes people do under- estimate what they may need. Remember retirement could be seen as a long holiday and most people spend more when they are on holiday!
Q: How do you factor in inflation?
Our cashflow program makes an assumption for inflation and all projections are shown as todays equivalent values – we are currently using RPI of 2.5% in the projections and CPI of 2%. Remember that often we are looking 40 – 50 years into the future and this is an average rate so won’t necessarily be closely linked to this month or this year’s inflation.
Q: What cashflow planning software does Tilney use? And is there anything available at nil/low cost that Tilney would recommend that individuals might "trial" in order to ... start thinking about this, sensibly, before a detailed review with Tilney. As clearly, this is an iterative process so the more thinking we've done about "what if" before the process starts, the more efficient the review and the better the possible answers
We use a system which is linked to our back-office client management system and developed with our typical client requirements in mind. Some pension companies and online investment platforms will offer a simplified retirement or investment projections on their online services for customers, but I have not come across one that can factor in all the different taxation and flexible drawdown possibilities. I am afraid I do not have experience “off the shelf” systems to be able to recommend one.
Q: Where do you find an ISA paying 2%? What’s the impact of the low interest rate environment?
Part 1 -It is important to remember that in the cash flow forecast we are looking at average annual returns over a long period. 2% was used in the initial graph which would be the approximate returns we would expect from a defensively positioned well diversified stocks and shares ISA with a low equity content because these clients were cautious investors. In reality some years would provide higher growth and others lower so you may get a good return or you may get back less than invested. Later on in the discussion we showed the impact of increasing the risk and therefore potential returns for the clients once we have explored their capacity for loss, need for growth and investment term in more detail. As was highlighted in the presentation this discussion about risk and reward and correctly assessing how much risk is appropriate is vital and tailored to each client and their circumstances.
Part 2 – the low interest environment we have been experiencing in recent years is particularly challenging for those who need a particular level of growth to make their savings last for life but are not comfortable with any investment risk at all. For some clients who are not prepared to take any risk at all the only option may be to carefully control spending during this period and of course to make sure they are not missing out on valuable tax reliefs to make their funds stretch further.
Q: Do you not factor state pensions into the cashflow forecasts?
Yes the system does factor in state pensions to the forecasts. We ask our clients to apply for a pension forecast online before we build the cashflow.
Q: Have you taken into account the state pension? What about taxation?
As above and yes both are built into the projections.
Q: Is there a limit to which you advise clients to reasonably invest in a pension?
I think this question was partly answered later in the presentation, there are advantages to having a spread of different types of assets although the arguments for maximising pension savings are strong because of the tax relief available. We would always advocate that clients should keep some funds available on deposit for emergencies and take out protection products such as life assurance and income protection as a priority if they have dependents or liabilities which will need to be covered if they die or become too ill to work. Then after that if they have further funds left over it will be down to individual circumstances as to how much is appropriate to put into pension or other types of investment products.
Q: What advice can you give for finding financial advisors who can help given the concerns around PFAs being tied to certain providers? Having been mis-sold a personal pension in my 20s I am scared to talk to anyone.
I am sorry to hear that you had a bad experience. The Financial Conduct Authority (FCA) host the Financial Services Register which lists all authorised firms, if you are approached by a financial adviser you should first check that the firm is registered and has the required permissions to advise in that area. Any financial adviser should explain in the very first meeting whether they are Independent or Restricted and explain what this means. In the first meeting you should also receive a clear explanation of how they charge for their advice.
Q: How to save the pension from the evil taxes?
Most types of investments pay some form of tax. Growth in pensions doesn’t attract income tax or CGT, pensions are generally outside of the estate for IHT too, and of course there is tax relief given on the contributions into pension. The two taxes to consider are income tax when you draw your pension but for most people this will be at a lower rate in retirement that whilst working, and the Lifetime Allowance charge which applies only to the excess over LTA.
Q: If an individual has more than one DC pension pot, how and when is the excess over Lifetime Allowance assessed? And how and when is the excess tax paid? Of course, it may be only when two or more pots are aggregated together that an excess over LTA would be apparent.
Short answer – it’s complicated! Which is why we always advocate taking advice if you think you will be near the LTA.
An example might help here: - (note this is simplified as I have assumed that the LTA stays at the current rate throughout, and the client has no LTA protection in place)
Mr Smith has a total pension pot (when adding up all of his pensions) of £1,200,000. At age 58 when the standard lifetime allowance is £1,073,100, he decides that he needs a lump sum of £100,000 and so he crystallises £400,000 from one of his pensions releasing £100,000 pension commencement lump sum (25%). He chooses to leave the remaining £300,000 invested and not draw income from it for now – these funds are referred to as crystallised and his remaining £800,000 is uncrystallised. At that point he has used 37.28% of his lifetime allowance as £400,000 is 37.28% (rounded) of £1,073,100. The pension company will write to him stating the percentage LTA used and he should keep this record.
Assume that 5 years later at age 63 he decides to take a further lump sum of £100,000 and crystallises a further £400,000 from another pension and the lifetime allowance that year is still £1,073,100, he will have now used a cumulative 74.56% of his LTA.
Assume then at age 65 he decides to take out the remaining lump sum and start a regular pension from the combination of all of his remaining funds. Let’s assume by then that the remaining uncrystallised value of all his pensions is £600,000. He has 25.44% of the LTA left. If the LTA is still frozen at £1,073,100 by then he will only have £272,997 unused lifetime allowance and so £327,003 of his fund will suffer a lifetime allowance charge which will be deducted by the scheme administrator. Note the 2x £300,000 crystallised income funds that were left behind when he took the first two payments of lump sum are not included in this calculation as they have already been tested against the LTA (however see point below).
If he had decided not to make any further withdrawals and just left the pension to grow, then on death or at age 75 if earlier the remaining uncrystallised funds would be tested against the remaining LTA and the charge would be taken at that point. Also, at age 75, the growth on the £600,000 (2 x £300,000) crystallised may also be subject to an LTA charge on the growth, unless that growth has been taken out as income before age 75.
Simultaneous Benefit Crystallisation Events (BCEs)
If two or more BCEs occur at the same time, there are special rules about their timing.
When a pension commencement lump is taken (BCE 6) it is always assumed to have been paid immediately before the related pension entitlement. So, for example if a member draws their final salary scheme the lump sum will be tested first followed by the income. This will also be the case if a member crystallises their money purchase scheme and takes 25% tax free cash before placing the remaining funds in drawdown or purchasing an annuity the lump sum will be tested first. Even though you are not required to draw out the tax-free cash for up to 12 months it is still tested before the corresponding pension.
If there are two or more BCE 7s (lump sum death benefits), they are assumed to be simultaneous and any LTA charge payable will be owed in proportion to the size of each BCE.
All other BCE events, the member can choose what order the BCE arise.
Q: How does investment growth impact on LTA? If I put in £1m but my fund grows to £1.2m when I access my benefits, do I still face a clawback on the portion over the LTA? It sounds like it is caught but I wanted to check?
Investment growth is included in the LTA calculations – it is the value of the pension at the point that you take benefits out, or die, or reach age 75 if later that is used in the calculation less any funds that have already been tested against LTA.
Q: Defined benefit pension contributions - how are these calculated against £40k pa limit?
In practice the scheme administrator should provide the exact figures but in simple terms the pension accrued by the start of the year is multiplied by 16, the pension accrued at the end of the year is also multiplied by 16. Any lump sum in addition is added to these. The opening value is then subtracted from the closing value, an allowance is taken off for CPI, and the remaining difference is tested against the annual allowance.
Q: Ref MPAA, do AVCs held in a unit-linked plan but with a start date linked to a DB pension count as being categorized DB or DC for the purpose of MPAA? in other words, does taking AVC at same time as DB pension count as taking the first £1 of income?
Yes It would count if you took the AVC funds as flexible drawdown income, but not if you took it as an annuity or if the AVC funds were used to fund the Pension Commencement Lump Sum of the main scheme which is often the case with AVCs linked to DB schemes.
Q: Is the tax charge for an excess over the LTA taxed at more than the tax relief I would have received on the contribution - or am I actually worse off than if I had never made the contribution?
It depends on the rate of income tax relief you got on the way in and the combination of LTA and income tax on the pension on the way out, but also don’t forget you have received growth free of most income and capital gains tax and the funds is efficient for IHT, so there are certainly circumstances where despite LTA people are still better off. We would need to look at your own circumstances to be able to confirm.
Q: Is the LTA multiple for DB pensions still 20 times?
Yes in simple terms, the full pension after any commutation for tax free lump sum, with the TFC then valued separately, In practice the scheme administrator should confirm the figure.
Q: I will need to move my defined contribution scheme funds out of my employer's scheme when I retire. Would it still be outside IHT?
If you keep the funds within a modern pension plan then yes, they should be, but examination of the new scheme documentation would be required to check if the death benefits are under discretion of the Trustees or paid directly to the estate. One important thing to note is that were you to die within 2 years of the transfer from one scheme to another the transfer would need to be noted on the IHT return and will be examined to see if there is any IHT due. I strongly suggest taking advice if you are thinking of moving pensions from one scheme to another.
Q: Is the lifetime allowance something to think about when I am young and in employment?
The current lifetime allowance is £1,073,100 which may seem a huge sum if you are early in your career but consider that for DB schemes the multiple to test against LTA is 20 times the pension so a pension of over £53,655 will create an LTA charge. So, it is important to give some thought to this if you are in a high salary role with a pension scheme attached, I certainly would not suggest opting out of an employer-funded scheme just because of potential LTA issues when you are young, but it may influence your decisions on where to save an excess income you have left over every month. As ever, sorry to sound like a broken record, but do take advice on your own situation.
Q: What's the best way to look into the allowances mentioned in the talk?
It is not clear whether the enquiry related to the LTA/ AA or the tax reliefs and allowances mentioned later in the presentation. Tilney have a guide called “Planning for Retirement” which is a really good place to start, along with our guide to “Tax Efficient Investing” and then take advice from a qualified financial adviser about your own particular position.
Q: If you believe you'll go over the LTA purely from growth on existing portfolio, is it then more tax efficient to invest in alternative pots e.g., LISA?
Another good LTA question, it depends on the importance of other aspects such as IHT efficiency within pensions, and also what rate of income tax plus potential LTA will you pay in retirement compared to the tax relief you will get on your contributions. Everyone’s circumstances are different, so it is important to look at the holistic position and not just the LTA in isolation. We discussed the advantages of having different pots later in the presentation so hopefully this answered that point too.
Q: What are some good SIPP plans available in the market?
There are many SIPP plans available, it is important to note that the SIPP is just the wrapper and the success or otherwise of your pension will be influenced more by the investments you choose within that wrapper and how much you pay in, although efficient administration and reasonable charges will also be important. At Tilney we work with a panel of providers that we regularly review and consider to be good value, efficiently administered and offer the flexibility of investment and retirement options that we need. We match the recommendation to the client depending upon their individual needs. Remember that SIPPs are not the only types of pensions out there and are not suitable for all.
Q: Are flexible drawdown options always offered on DC schemes (where you can drawdown money quarterly or annually and leave the rest invested)? Is this better than an annuity (as you can control how much is taken when you need it)?
Not all DC schemes offer flexible drawdown, some still require you to purchase an annuity or transfer elsewhere to a more flexible plan if you wish (a decision that should not be taken without careful consideration, research and advice). Annuities still have an important role to play for some people where guaranteed income is their priority, flexi access options involve exposure to investment risk which is not always suitable for everybody.
Q: If you have around 10 years left before retirement and not much invested is there a best option for maximising your return?
No one best option suits all, but the ideas mentioned towards the end of the webinar about maximising the tax reliefs available to make every £1 stretch as far as possible is a good place to start. I recommend having a look at our guide to” Planning for Retirement” as a starting point and then taking some advice on your own needs and requirements.
This document is solely for information purposes and is not intended to be, and should not be construed as financial advice. Whilst considerable care has been taken to ensure the information contained within this document is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information. Regardless of the choices you make you should always remember that the value of an investment may go down as well as up, and you may get back less than you originally invested. Tax rates and reliefs depend on individual circumstances and may change.
Tilney Financial Planning Limited, authorised and regulated by the Financial Conduct Authority.
November 2021