news

5 signs you could benefit from income protection

September will mark the first Income Protection Awareness Week. Income protection can provide financial security when you need it most, but it’s often something that’s overlooked. If you recognise these five scenarios, it may be worth looking at how income protection could fit into your wider plans.

1. Your employer doesn’t offer sick pay

It’s worth looking at the benefits your employer offers when weighing up the pros and cons of income protection. You should check what your employer’s sick pay policy is and how long it lasts.

Many employers offer an enhanced sick pay policy that means you’d continue to receive an income in the short term if you were unable to work. However, it’s worth noting that these policies rarely go beyond 12 months. So, an income protection policy with a long deferment period may still be beneficial.

If your employer doesn’t offer sick pay, you will usually receive Statutory Sick Pay (SSP) if you need to take time off. SSP pays £96.35 each week in 2021/22 up to a maximum of 28 weeks. Relying on SSP alone can mean you face serious financial difficulties if your income did stop due to illness.

2. You are self-employed

If you’re self-employed, taking time off work can have a huge impact on your income and may even affect long-term projects. It may mean you’re tempted to work despite being ill or that you rush back too soon without giving yourself enough time to recover. Receiving a reliable income through an income protection policy means you can focus on your health without having to worry about financial security.

3. Your emergency fund wouldn’t cover essentials

If you have to rely on your emergency fund, how long would it last? An emergency fund is an excellent option for providing short-term financial security if the unexpected happens. This money should be readily accessible and ideally cover three to six months of expenses.

If your emergency fund wouldn’t be enough to provide peace of mind, income protection could help.

While your emergency find may provide security for a few months, if a long-term illness affected you, you could still find that you face financial insecurity. Again, income protection with a long deferment policy can give you confidence while reducing premiums in this case.

4. Your salary is the main income source for your family

Your income may be essential for your family’s finances. If you have dependents, taking additional steps to ensure financial security if the unexpected happens becomes even more important. Losing income even for a few months could mean significant lifestyle changes for your family and may affect long-term prospects if you’re forced to dip into savings.

5. You don’t have any passive sources of income

If you have a passive income, such as from investments or rental properties, you may be able to cover the essentials and maintain your lifestyle without your salary. However, if your entire income relies on you being able to go to work, it’s worth thinking about how income protection could provide certainty.

How much does income protection cost?

Income protection will pay out a regular income if you’re too ill or injured to work until you can return, retire, or the policy ends. It can be difficult to put a value on that, but often income protection is cheaper than you think.

Many things will influence the cost of income protection. This includes decisions you make when selecting a policy, like the level of cover you want or how long you’ll need to wait before making a claim. Your health and lifestyle can also have an impact, from your age to whether you smoke. As a result, it’s important to receive quotes that are tailored to you but don’t simply dismiss income protection as expensive.

As with all financial decisions, you need to consider if income protection is right for you. Spending some time contemplating how you’d cope financially without your income can help you assess if income protection can add value to you. If you’d like to discuss whether it makes sense for your circumstance or need help choosing an appropriate income protection policy, please contact us.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Cashflow modelling: How it can give you confidence in your choices

When you’re making financial decisions, one of the challenges is understanding the impact that it could have on your long-term finances. Not understanding the impact means you’re unsure what you should do, or when you do make a decision, you still won’t have full confidence in it. Financial planning can help you weigh up the short- and long-term implications.

Cashflow modelling is just one of the tools that can help create a plan you can rely on when working with a financial planner. Even if you’ve used cashflow modelling before, you might not be aware of how it works or how it adds value to your plans. Read on to find out.

What is “cashflow modelling”?

Cashflow modelling is used to forecast your financial future. It can help you understand how your wealth and income may change, whether you want to look 5 years ahead, or 30. It’s a way of answering questions like: “Do I have enough money?”

The first step when using cashflow modelling is to input data. This may include how much you have saved in your pension, your current income, or the size of your investment portfolio. It’s important these figures are accurate as they provide the foundations for calculations.

On top of this basic information, you can add extra details that will provide a forecast. This information is based on assumptions that may include:

• The annual return of your investments
• Adding a certain amount to your pension until you reach pension age
• The rising cost of inflation and how it will impact your outgoings.

It’s important to note that you can’t guarantee these assumptions will happen, but they help build a relatively reliable picture of how your wealth will change over time. This can give you confidence in how financially secure your future will be. With this information, you can see where gaps are, allowing you to take steps to bridge them sooner.

Helping you make big financial and lifestyle decisions

When managing finances, you’ll face some big decisions. It can be difficult to know what the right option is. When using cashflow modelling, you can add new assumptions that will forecast your wealth based on different scenarios. This means you can answer questions like:

• Would I run out of money if I retired five years early?
• Would providing a financial gift to my children now affect my future?
• Can I afford to take a lump sum from my pension to travel now?
• Can I take a larger income from my pension and still have enough for the rest of my life?

Cashflow modelling lets you see how moving ahead with these types of decisions will affect your income now and in the future. It can help put the decisions you’re making into context. For example, if taking a lump sum from your pension to travel now meant a lower income in the future, would you do it? For some, travel will be a priority that means a lower long-term income is worth it. For others, scaling back travel plans would make more sense. Understanding the implications of your decisions can mean you make the choice that’s right for you.

It can also help you see how every day, smaller financial decisions can add up to provide you with more freedom in the future. For example, even a small increase in your pension contributions can mean you have the freedom to tick off bucket list items while still being financially secure.

Planning for the unexpected

Cashflow modelling doesn’t just help you answer questions when you’re deciding how to use your wealth; it can help you prepare for things that are outside of your control, too.

You may, for instance, worry about how your partner would cope financially if you passed away. Cashflow modelling can help you visualise this and show what steps you could take to provide security. This could mean taking out a life insurance policy or purchasing a joint annuity in retirement.

Alternatively, you may want to understand whether your retirement would still be on track if your investments didn’t deliver the expected returns. Or whether you could afford to pay for care in your later years.

These types of scenarios can be difficult to think about, but being proactive can provide peace of mind. By looking ahead, you’re in a better position to reach your goals and create financial security, even when the unexpected happens.

If you’d like to discuss how your decisions can affect your financial future, please contact us.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

What is pension tax relief? How it can help you reach retirement goals

There are many excellent reasons to save into a pension. One of them is the tax relief you benefit from, but many pension savers are overlooking this valuable boost to retirement savings.

According to a Royal London survey, just 15% of people fully understand how tax relief on pensions is paid. Importantly, once people had a better understanding of how pensions tax relief works, 25% were more likely to increase pension contributions. Tax relief can help boost your savings and put you on a path to a more comfortable retirement.

What is pension tax relief?

Pension tax relief is offered to encourage more workers to save for their retirement.

When you contribute to a pension, some of the money you would have paid in tax on your earnings goes into your pension rather than to the government. Tax relief is paid at the highest level of Income Tax you pay:

• Basic-rate taxpayers receive 20%
• Higher-rate taxpayers receive 40%
• Additional-rate taxpayers receive 45%.

In Scotland, the tax bands are slightly different and affect how much tax relief you receive:

• Starter-rate taxpayers receive 20%
• Basic-rate taxpayers receive 20%
• Intermediate-rate taxpayers receive 21%
• Higher-rate taxpayers receive 41%
• Top-rate taxpayers receive 46%.

If you wanted to add £100 to your pension, tax relief means you wouldn’t need to take the full amount out of your own income or savings. If you’re a basic-rate taxpayer, you can add £80, and the government boost will mean an extra £20 is added, as this is the amount that you would have paid in tax when receiving your income.

Higher-rate and additional-rate taxpayers would only need to add £60 and £55, respectively, to their pension to benefit from a £100 boost.

Tax relief is a useful way for making your retirement savings go further and can mean you’re able to look forward to a far more comfortable retirement. Tax relief is one of the reasons that adding money to a pension is a tax-efficient way to save for the long term.

The relief you receive will usually be invested through your pension, helping it to grow even further, along with your and your employer’s contributions.

How do you receive pension tax relief?

Usually, your pension provider will automatically send a request to HMRC for 20% tax relief, but you will need to complete a self-assessment tax return to receive your full entitlement if you’re a higher- or additional-rate taxpayer. It’s worth reviewing your pension contributions and tax relief to ensure you’re receiving your full tax relief.

2 pension tax relief allowances you need to be aware of

While tax relief is valuable, two allowances limit how much you can place into your pension while benefiting from tax relief.

1. Annual Allowance

The Annual Allowance is the amount you can save into your pension each tax year while still benefiting from tax relief.

The maximum Annual Allowance is £40,000 or 100% of your annual earnings. However, if you earn more than certain thresholds, your annual allowance will reduce under the tapered Annual Allowance. These thresholds are:

• £200,000 threshold income (your net income for the year, including salary, bonus, etc.)
• £240,000 adjusted income (your income, plus the value of your or any employer pension contributions).

For every £2 you exceed these thresholds, your Annual Allowance is reduced by £1. The maximum deduction is £36,000, meaning some high earners are left with an Annual Allowance of just £4,000 per tax year.

If you’ve already started drawing an income from your pension, you may be affected by the Money Purchase Annual Allowance (MPAA). This will reduce your Annual Allowance to £4,000.

It’s important you understand what your Annual Allowance is to make the most of your pension contributions and avoid unexpected tax bills. If you have any questions, please contact us.

2. Lifetime Allowance

The Lifetime Allowance is the total amount you can save into your pension while still benefiting from tax relief.

The Lifetime Allowance is currently £1,073,100. This may seem like a lot, but it can be easier to exceed than you think. The Lifetime Allowance applies to the total value of your pension, including your contributions, employer contributions, tax relief, and investment returns. Over decades of working, you may be closer than you think to the allowance.

You can still add to your pension if you exceed these limits, but you could find yourself with an unexpected bill. In some cases, it still makes financial sense to contribute to your pension. For example, your investments will still grow free from Capital Gains Tax, and your pension scheme may offer auxiliary benefits, like a spouse pension, that are valuable to you. In other circumstances, it may make more sense to invest or save your money elsewhere.

If you’d like to discuss how pension tax relief can help you build up your retirement savings or whether you’re close to exceeding your allowances, please contact us.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

Your pension income could also be affected by the 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.

State Pension triple lock: Could the pandemic mean a bumper rise?

Every year, the State Pension triple lock is debated. The government has already ruled out scrapping the State Pension guarantee, but the pandemic could mean it costs far more than expected. If you’re a pensioner, you could see your income enjoy a record rise.

What is the State Pension triple lock?

The triple lock guarantees that the State Pension will rise each tax year. This helps to preserve the spending power of pensioners as inflation means the cost of living rises.

The State Pension will rise by the greatest of these three measures:

• Average earnings growth
• Inflation, as measured by the consumer price index
• 2.5%.

When calculating for the 2021/22 tax year, the 2.5% measure was the greatest. So, those receiving the full State Pension saw their income from it rise from £175.20 each week to £179.60. Over the year that adds up to an extra £228.80 a year. That may not seem like a lot, but the triple lock is important for ensuring pensioners can maintain their standard of living. Over the long term, inflation would have a serious impact on spending power.

Maintaining the triple lock was a Conservative manifesto pledge but there has been speculation that it will be scrapped or changed. However, a government spokesperson confirmed in June that they remained “committed to the triple lock”, according to a Reuters report.

What has the pandemic got to do with the triple lock?

The pandemic means the government could face a far larger bill to maintain its triple lock pledge.

During the pandemic, lockdowns affected average earnings. This means as millions of people return to work, take-home pay has increased significantly and has skewed official data. According to the Office for National Statistics (ONS), April 2021’s pay growth was 8.4% when compared to a year earlier. The ONS notes that the average pay growth rate has been affected upwards by Covid-19 lockdowns.

As a result, pensioners could be on course to receive a record increase to their pension for the 2022/23 tax year. The Telegraph estimates that it could cost the government £7 billion to meet its triple lock commitment if the State Pension rises 8.4%, around £5 billion more than the minimum 2.5% increase would cost.

For pensioners receiving the full State Pension, an 8.4% increase would mean their income rises to £194.68 a week and their annual income increases by £784.16. To put that rise into perspective, the triple lock was introduced in 2010 and since then the largest annual increase has been 5.2% in 2012.

Government backbenchers call for amends to be made

While the government has reaffirmed its commitment to the triple lock, some MPs are calling for the way the rise is calculated to be amended for one year.

They state that the ONS figures are distorted, as in reality many workers have faced pays cuts and job insecurity over the last year. Speaking to the Telegraph, Nigel Mills, chairman of the all-party parliamentary group on pensions, said: “The triple lock wasn’t meant to be based on artificially out of line earnings data.”

Instead, he proposes calculating a two-year average earnings figure to smooth out the “artificial spikes”. The chancellor plays a key role in the decisions, and with a need to balance the books against pandemic borrowing, it could be something Rishi Sunak considers. A final verdict isn’t expected to be made until November.

Maintaining your spending power in retirement

Considering how your spending needs will change throughout retirement is important. Inflation means you need to consider how your outgoings will change over a retirement that could last several decades. The triple lock helps to protect your State Pension income, but that’s likely to be just a small portion of overall income; what about the rest?

There are things you can do to help ensure your retirement income continues to keep up with inflation. When purchasing an annuity, for instance, you can opt for one that increases each year. Or if you’re accessing your pension flexibly, managing investments can provide an opportunity for savings to grow to match inflation, but there are risks to consider too.

If you’d like to discuss how to make sure your pension and other assets can provide an income throughout retirement, even as the cost of living rises, please contact us.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

Your pension income could also be affected by the 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.

What does the end of the Stamp Duty holiday mean for the property market?

“It won’t pay out” and other financial protection myths busted

ESG investing: The impact climate change could have on your investments

5 excuses for not seeking financial advice, and why they’re wrong

Is £26,000 the secret to a happy retirement?