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September 2019 Newsletter

As we enter the last third of 2019 amid continued political turmoil and stock market volatility, we hope our latest newsletter provides a little light relief from the doom and gloom that has been dominating the headlines. Articles include using your spare cash to top up your child’s pension, how to avoid triggering the £4,000 money purchase allowance and some interesting figures on the effect of inflation on retirement income. We hope you find the articles useful.

In this issue:-

A Word About the Current Stock Market Environment
Spare cash? 3 Reasons To Top Up Your Adult Child’s Pension
Life Expectancy vs Health Expectancy – Funding Your Retirement
How to Avoid Triggering the £4,000 Money Purchase Annual Allowance
The Biggest Risk to Retirement Income
How Employers Can Support Mental Health in the Workplace

A Word About the Current Stock Market Environment

Generally, our recommendation to our clients is that investment strategies are reviewed at least once a year, but often this results in relatively little change unless the investor’s own circumstances have altered dramatically (e.g. changing working hours or starting retirement).

The reason is that for most of us, it is our long-term view we anchor to and so the strategy designed for this rarely alters, once the relevant risk tolerance has been assessed and agreed.

The unusual stock market environment we currently find ourselves in helps to reinforce the need for that stable long-term approach. A broadly diversified portfolio helps to ride out the inevitable short-term fluctuations: who could have predicted that global equities would return 11% annualised over the last 5 years or that UK Bond yields would fall below 1% (a 200-year low)?

We find ourselves in the midst of various political and economic challenges both at home and overseas. This will continue to affect short term investment returns and provides uncertainty, making any market exits and returns an almost impossible challenge to time. Therefore, remaining with that long-term view and accepting some bumps along the road continues to be our recommendation and that of most investment managers.

Spare Cash? 3 Reasons To Top Up Your Adult Child’s Pension

Many parents are unaware that under current tax rules, they can use their own funds to boost the pensions of their adult children. There are 3 big advantages for the recipient as well as benefits for the parent, so it’s a win-win situation for both parties.

Firstly, the contribution is treated as if it had been made by the recipient and thereby attracts tax relief at the basic rate. A contribution of £800 therefore becomes £1000.

Secondly, if the recipient is a higher rate taxpayer the tax relief on the contribution can be reclaimed via their annual tax return, thereby reducing the recipient’s tax bill.

Thirdly, if the recipient is earning £50,000 – £60,000 (or slightly above) and has lost some or all of their child tax benefit, the funds contributed by their parent would be deducted from their income before the child benefit charge is considered which would reduce the amount of the charge. In fact, for somebody with earnings of £60,000, a parental contribution of £8,000, grossed up to £10,000 by tax relief, would remove the child benefit tax charge entirely.

The advantages are not all one-sided. Aside from wanting to help their children, if the parent is reaching their own annual limit for pension contributions, a contribution to assist their adult child may be a good use of their funds and could also help reduce their future IHT liability.

For more information or to discuss further in relation to your own circumstances, please get in touch.

Life Expectancy vs Health Expectancy – Funding Your Retirement

The NHS vision of self-help prevention is set out in the Government’s recent consultation paper “advancing our health: prevention in the 2020s” which states that the 2020s will be a decade of proactive, predictive and personalised prevention. This puts the focus on us all to become co-creators of our own health through the use of technology, information, increased screening and health interventions, rather than being passive recipients of care.

We are all living longer with life expectancy well into our 80s, however according to figures from the ONS the average person spends over 20% of their life in poor health (on average 16 years for men and 19 years for women). We therefore need to think about ‘health expectancy’ versus life expectancy. The ONS data shows that women are generally disability free for 62 years on average, while for men it’s to age 63. If we are to live up to a fifth of our life in ill health we should be focusing on how we can improve our health and wellbeing during our best years whilst also ensuring we are making financial provision for when it’s really needed.

Part of the Government vision is to use data gathered from various sources including fitness trackers and apps to predict where people need help with managing their health and we will see an increase in the use of this technology as incentives in the health insurance industry. The Government also wants to use intelligent screening, precision medicine and genetic testing to reach more people with better treatment earlier, personalised to an individual’s genetic make-up. But all this requires more public trust and engagement. It also has implications on the insurance industry that must evolve to ensure that people are not refused or penalised cover unfairly based on genetic pre-disposition or early-detection.

This means that the insurance industry needs to consider how their policies are updated to cope with the possibilities of ever earlier critical illness diagnosis and an associated rise in claims in the future. It could then result in a gradual rise in premium rates and even changes to the way claims are defined (currently it’s a simple “on diagnosis” for most Critical Illness plans).

Life and Critical Illness cover still represents an efficient way for most of us to provide a safety net to help reduce the financial struggle whilst in poor health and beyond and now may be a good time to review and update your existing cover provisions.

How to Avoid Triggering the £4,000 Money Purchase Annual Allowance

As part of the new pension freedoms of 2015, the Money Purchase Annual Allowance (MPAA) was introduced to prevent savers recycling cash through their pension.

The MPAA is the maximum sum that can be contributed to a pension each year without incurring a tax charge and is triggered when pension funds are drawn in excess of the 25% tax free lump sum. In 2017 the MPAA was reduced from £10,000 to just £4,000, severely restricting the annual pension contribution for many savers and something which many people are still unaware of. However this charge can be avoided by using the ‘Small Pots’ rule.

A pension of £10,000 or less is considered a small pot and if completely emptied, will not trigger the MPAA charge. Therefore, if you need to draw funds from your pension but wish to continue contributing to your pension in the future, it is important to consider the order in which you access your funds.

Equally if you are considering consolidating several pensions into one, and you are still working, it may be worth leaving a smaller pot just in case.

To discuss this further, please get in touch with your usual JJFS contact or email justask@jjfsltd.com

The Biggest Risk to Retirement Income

Stock market volatility and investment risk are intrinsic factors in generating the required capital growth to provide an income throughout the average retirement. However few realise that the biggest risk to a successful retirement is in fact, inflation.

According to data from the Dept of Work and Pensions the average retirement age for men is 65 and 64 for women. And according to data from financial research consultancy Finalytiq, a UK male has a 50/50 chance of living to age 88 and a UK female to age 91 – with a further 10% chance of one of them living to 102. So that’s a 30+ year retirement, which is 30+ years of drawing your pension and, taking into account inflation, that’s 30+ years of rising prices. Startling figures given the average UK pension savings for those aged 40-60 is only £60,000 (according to LV=).

Using an inflation rate of 4% the effects on a £40,000 lifestyle income requirement for a couple aged 65 and 64 is sobering. The cost rises significantly:

£59,210 after 10 years;
£87,645 after 20 years;
£129,736 after 30 years;
£170,724 at age 102.

So, an average retirement of around three decades shows lifestyle costs increasing more than three times and for those who reach their centenary, it’s a four-fold-plus increase.

This further underlines the need to start saving for retirement as early as possible and regular reviews to ensure your funds remain invested appropriately as your needs change over the years.

How Employers Can Support Mental Health in the Workplace

Raising awareness of mental health in the workplace has featured prominently this year, particularly focusing on traditionally male-dominated industries such as farming, agriculture and construction.

According to recent statistics from the Mental Health Foundation, 70 million workdays are lost each year due to mental health problems in the UK. Although overall sickness absence rates have fallen to record lows over the past 20 years, mental ill health and presenteeism (when employees come into work despite being unwell or unfit to work) are increasing, costing organisations and the economy billions of pounds a year. The government suggests the cumulative economic cost could be as high as £100 billion a year and the CIPD estimates sickness absence costs employers £522 for each employee.

The 2017 Stevenson/Farmer review commissioned by the Government to provide an insight into workplace mental health, found that more than 1 in 6 (15%) people at work had symptoms of an existing mental health condition. The review called for the government to focus on equipping organisations with the tools they need to address and prevent mental ill health in the workplace and help employees to access the support they need. The review outlined a number of practical tips to help employers better support the mental well-being of their employees:

Produce, implement and communicate a mental health at work plan aligned with the core and enhanced standards set out in the review
Develop mental health awareness among employees
Encourage open conversations about mental health and the support available when employees are struggling
Provide employees with good working conditions, and ensure they have a healthy work-life balance and opportunities for development
Promote effective people management through line managers and supervisors
Routinely monitor employee mental health and well-being
Having access to early intervention resources for employees suffering mental ill health can be key to supporting recovery.

Most insurers provide a range of ancillary support services to assist employers to maintain mental health in the workplace and assist employees back to work as quickly as possible. For example, specialist training for management and HR, mental health awareness materials for employees and staff training on resilience and well-being as well as early intervention to prevent longer term problems and access to treatment, well-being resources and local support networks.