In my line of work, as an independent financial advisor (IFA), I have the pleasure of speaking to people at all stages of their financial life. Some are just beginning to consider major decisions like pensions and investment, while others have already retired but are finding they are struggling to make their money stretch as far as they were hoping.

There are many reasons why people struggle financially in retirement, and we have found that retirees are often still making financial mistakes well into their 60s, 70s and 80s. Here’s my list of some of the common mistakes to avoid in retirement.

1. Withdrawing your pension into a bank account

Citizens Advice has found that some 30 per cent of those who decide to cash out their pension early are then paying it straight into a regular bank account with little to no interest paid on it.

We now enjoy a few more freedoms to decide when to withdraw our pension cash, but this doesn’t mean that withdrawing the money early in your retirement is necessarily the right thing to do – especially if it’s going to languish in an account that pays less than inflation.

Remember, you can withdraw 25 per cent of your pension pot as a tax-free lump sum, but once that’s gone, it’s gone. You’ll then be limited to your personal allowance only, or you’ll be paying tax on the rest. If the tax-free lump sum amount is forming part of your retirement plan, it might be best to leave it where it is for a little longer.

It is important to remember that investments do not include the same security of capital which is afforded with a deposit account. Therefore, if you have any concerns regarding the level of investment risk your pension funds are exposed to, please contact us for a review.

2. Spending too much too soon

Retirement, for most, is a marathon, not a race. You could easily spend two or three decades in retirement. Withdrawing your tax-free lump sum to help your son or daughter onto the housing ladder might seem like the best use of your cash as soon as you can access it. However, what happens ten or 15 years down the line when your money runs out?

At the same time, we understand that it can sometimes be rewarding to spend more during the early years of your retirement when you can enjoy travelling more easily, for example.

Working with an IFA can help you get the balance right by planning out your retirement clearly with your personal hopes and dreams for retirement at the centre of it all.

3. Failing to review your pension investments regularly

Even before you’ve retired, it makes sense to regularly review where your pension is invested and obtain a clear idea of your options. Simply investing your pension and then forgetting all about it is a common mistake among working-age people. However, once you’re retired, it also pays to keep abreast of new investment and savings opportunities by consulting with an IFA.

Remember, retirement is a time for a little R&R, but it’s also a surprisingly expensive period of your life, especially if you want to continue to live life to the full. Therefore, seeking professional advice even after you’ve retired will ensure you don’t suffer unnecessarily.

Important note: Pension income could be affected by interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

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Whether you are reviewing your pension or looking to invest for the first time, the amount of risk you are willing to take is one of the main decisions you need to make. As most people know, investing wisely is all about weighing up the risk against potential reward. Although you are never guaranteed to make money on your investment, as its value can fall as well as rise, getting your risk profile right can help you reach your financial goals.

Here is a Windsor IFA’s guide to the questions you will need to ask yourself to help you get your investment risk profile right the first time.

1. How long do you want to invest for?

If you are willing to invest over a longer period, you may be able to ride out investment fluctuations more effectively. When you make higher risk investments, you may find that your investment fluctuates more than a less risky option. Therefore, a short-term investment may hold more risk than a longer-term investment. This is because, over the long-term, stock market investments tend to rise above inflation – although there is no guarantee of this, of course.

2. What are your financial goals?

This is a key factor to be considered. If, for example, you simply want to invest your cash in products that will help your gains stay above the inflation rate, but anything over that is a bonus, then a relatively low-risk investment profile may be adequate. If your investment goal is to maximise gains over a particular term, you may want to invest in riskier products.

Your investment goals are likely to be affected by factors like your age, your financial status, your employment security, your family situation and your available assets.

3. What other assets do you have?

It is vital that you take the time to understand your actual financial position when considering your risk profile. Examining your assets and their value and future potential growth can help you to understand your financial goals. Speaking to an IFA can help you to take an objective view of assets such as existing pension pots, property and savings.

When weighing up how much risk you are willing to factor into your investment portfolio, this is a fundamental question to ask yourself. If you are investing just a small portion of your wealth, then a higher risk approach may be more palatable, whereas investing your life savings might need a more balanced approach.

Answering these four questions is just part of the process of deciding how much risk you are willing to expose your investment to. Personal finances can be an emotive topic, and, whatever your personal wealth, speaking to an IFA about your investments will help you to step back and make sensible decisions, which can increase your chances of achieving your goals.

Giles Warren, Independent Financial Advisor (IFA)

The value of your investment can go down as well as up, and you may get back less than the amount invested.

Pension drawdown schemes are intended to give clients more control over their pension funds and how and when to extract money from their pension pots. When you set up a pension drawdown scheme, you have the option to take out 25 per cent as a tax-free lump sum. Funds then need to be selected for the remainder of your pension pot.

You will be able to draw an income from this remaining pot on a flexible basis, but there are many factors to consider. As with all complex financial choices, it can be beneficial to talk to an independent financial advisor about your options.

Risk

Pension drawdown schemes, which are also known as ‘income drawdown’ schemes or ‘flexi-access drawdown’ schemes carry more risk than annuity schemes. This is because the income isn’t guaranteed for life so, to decide whether this type of scheme is right for you, it’s advisable to consider whether your pension pot will last you throughout your remaining life and if you need a flexible income.

Some of your income may be secure, such as a state pension or defined benefit/final salary pension scheme. Other income is flexible, such as savings and investments, salaried income and rental income, for example. Your Windsor IFA, Giles Warren, will help you to examine your income and work out whether a pension drawdown scheme is right for you.

If you do decide to go for a drawdown scheme, you will need to consider:

• How much you are likely to need to live on – taking into account your life expectancy isn’t always easy, but we can help you do this objectively.
• How much you can safely draw down each year. A tried and tested approach can be to withdraw just 4 per cent of your entire pension pot in the first year after retirement, increasing the amount by inflation each year after that.
• The fact that you can opt out of income drawdown schemes and use some or all of the pension pot to buy into an annuity later on if you prefer.
• How much you will be expected to pay in income tax on the income you draw down each year. Your IFA can help you plan the amount you drawdown carefully to limit your tax liabilities. You’ll want to avoid going into the higher tax bracket if at all possible.
• Your lifetime allowance. If your pension pot is worth more than £1,030,300, you’ll pay tax on the amount exceeding the limit when you withdraw it.
• Inheritance and how the drawdown scheme impacts your estate will also need to be considered.

There are pros and cons to pension drawdown schemes and deciding whether they are appropriate for your unique situation isn’t always easy. Speaking to an IFA can help you to make an informed decision and ensure your pension doesn’t run out before you do!

Many of us look forward to retirement and hope that we can be financially secure by the time we finish working for good. Careful planning helps but being aware that taxation can continue even past retirement is important if you are going to organise your finances properly. Here, we take a look at the issue of taxation after retirement a little closer.

Income tax

Many people do not realise that you will continue to be liable for income tax after you retire. You may not be receiving a salary any more, but many of you will receive a pension income. Although the State Pension is paid tax-free, this is only the case because it is under your Personal Allowance. You will pay tax on income received from a personal or workplace pensions once you exceed this Personal Allowance. The Personal Allowance for most people is £12,500 tax-free as of April 2019. You will also be able to withdraw 25 per cent of your pension pot tax-free in most cases.

Did you know you can now apply for a State Pension Forecast by filling in this form. This will provide you with an estimate of how much state pension you will receive, together with the date from which you can claim. Or if you know your Government Gateway login, you find out immediately online here.

For those receiving larger pension payouts, income tax is payable at the normal rates on anything over their personal allowance.

Savings and investments

Your income from savings and investments may be taxed, so it’s important to try to limit your exposure by making the most of tax-free savings products. You can invest £20,000 per year into a Cash ISA completely tax-free.

Interest on other savings is taxed, but each of us has a Personal Savings Allowance of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. This is the amount of interest from your savings you can receive each year tax-free.

Annoyingly, you used to be able to opt into receiving your savings income with the tax already taken off by filling in the R85 form, but this is now not the case. However, if you have previously done so, you will continue to receive your interest this way. For the rest of us with savings income over £1,000, HMRC collects the tax through our PAYE code.

Capital gains tax is payable on investment income, so bear this in mind when investing in the first place. Speaking to a good IFA about tax-efficient savings and investments can help to reduce your tax liability.

Inheritance tax

We can’t talk about retirement tax without touching on inheritance tax. Changes have been made recently to inheritance tax rules, which will scrap the tax completely for couples passing on their property up to the value of £1m from the 2020/2021 tax year.

This is being brought in through a new Main Residence Allowance, which will increase in increments over the coming years until it reaches £175,000 per person in 2020. This can be added to the existing £325,000 inheritance tax allowance to total £500,000 per person, hence the £1M per couple.

A new report by an influential think tank has suggested that the tax-free lump sum for pensions should be capped at just £40,000. Giles Warren Financial, and many other independent financial advisors, think this would be a mistake.  Here, we explain why.

What is the tax-free lump sum?

Currently, pensioners are usually able to take as much as 25 per cent of their pension savings as a tax-free lump sum. The maximum this could be, with a lifetime allowance standing at £1m, is £250,000.

Now, the Resolution Foundation has published a report calling for this tax-free lump sum to be capped at just £40,000. It argues that this would generate massive revenues for HMRC while only impacting a quarter of pensioners.

The report states: “The current ability to take over £250,000 tax free is worth up to £119,000 to an additional rate taxpayer, £105,000 to a higher rate payer, £53,000 to a basic rate payer and nothing to lower income pensioners who’d be below the personal allowance each year anyway.”

Why are IFAs hitting back?

IFAs around the country have been hitting back against these claims, pointing out the fact that a move to cap the tax-free lump sum would be damaging in several ways. Most importantly, we think that capping the amount you can withdraw as a pensioner without paying tax would discourage people from saving for their retirement in the first place.

“People are already feeling discouraged from saving for their retirement and a cap on the tax-free lump sum would simply disincentivise pension saving even further,” stated Giles Warren. He added: “We have seen cuts to the lifetime and annual allowances in recent times and a further cap would make pension saving less appealing to younger workers who need to be putting money aside for their future.”

As well as the pension cap idea, the Resolution Foundation’s report also called for the inheritance tax tax-free threshold to remain at £1m. This would mean that it would not increase alongside inflation.

Here at Giles Warren Financial we believe this would amount to a stealth tax increase. It is another idea that will work to disincentivise saving – as the real rate of tax will increase over the years. Failing to adjust the tax-free threshold in line with inflation means a greater proportion of people’s inheritance will be taxed.

Other ‘tweaks’ proposed by the Resolution Foundation in their report included scrapping savings schemes such as the Help To Buy ISA and the Lifetime ISA, both of which are aimed at trying to encourage responsible attitudes to money. They are open to everyone and help people to save tax-free for their future or for a home of their own.

Giles Warren argues: “Scrapping these products will leave a great number of people with very few avenues for saving without heavy taxation.

“Saving is already unattractive to many younger people, but at least tax-free ISAs give them a means through which to grow their cash. Taking these away would be damaging.”

As trusted providers of financial planning services in Windsor and beyond, we think it’s important to provide you with a quick debrief on how the recent Autumn Budget might impact you. Below we’ll explain how Philip Hammond’s latest Budget will actually affect you and your finances.

For taxpayers…

There was good news for taxpayers in the Autumn Budget. The Chancellor had previously announced his intention to increase the Personal Allowance to £12,500 from April 2020. He also promised to up the Higher Rate threshold to £50,000 at the same time.

In the Autumn Budget he brought these changes forward by a year to April 2019, so some of will see a meaningful reduction in our tax bill a little sooner than expected.

For homeowners…

Hammond also announced the extension of the relief on Stamp Duty to First Time Buyers of shared ownership properties up to the value of £500,000. This is the second year in a row that the Chancellor has extended Stamp Duty relief, further cementing the government’s attempts to help more people get onto the property ladder.

There were also some changes that will impact those selling their homes. As a homeowner, you can avail yourself of the Private Residence Relief on Capital Gains Tax charged on profits made from property. However, there were some minor changes to tighten this relief a little.

Now, if you let out your primary residence for a period, you must be in joint residence with the tenant to still qualify for full Private Residence Relief. Also, if you move out towards the very end of the period of ownership, you will only qualify for the relief if this takes place within nine months of the sale date.

For savers and investors…

There was very little in the budget to interest savers this Autumn. Hammond did, however, offer a small crumb to parents saving for their kids’ futures with an increase in the Junior ISA and Child Trust Fund tax-free limit to £4,368.

And for National Savings and Investment (NS&I) savers, there was good and bad news. On the one hand the government said it wants to attract more people to Premium Bonds by relaxing rules on parents buying them for their children. It is also planning to reduce the minimum purchase of the bonds and release an app to make them even more attractive to savers. On the other hand, those who invested in NS&I’s index-linked savers certificates, will see their returns reduced significantly as the interest will now be linked to the Consumer Price Index, as opposed to the Retail Price Index (reducing the interest from 3.3% to 2.4% as things stand today). This is likely to leave around 500,000 people rather disappointed.

For pension savers…

Although many of us expected changes to the pension tax relief regime, this didn’t come up. However, the Lifetime Allowance, which is the limit on the value of the private pension each person can draw from before they are taxed, will increase a little to £1,055,000, from £1,030,000 from April 2019.

Our conclusion…

Despite all the talk of the ‘end of austerity’ and increased economic growth projections, there was very little in this Budget to suggest anything much has changed. It seems that the shadow of Brexit is simply looming far too ominously for Hammond to make any significant moves towards putting cash back into people’s pockets just yet.