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Building up your nest egg is more discipline than difficult

For today’s retirees, retirement has changed almost beyond recognition since their parents’ day. Building a retirement fund requires saving enough money to pay your bills and continue living comfortably when you are no longer drawing an income.

The thought of it may be daunting; it can feel like an impossible mission. But with early planning, building up your nest egg is more discipline than difficult. The process of building a retirement fund typically involves a combination of consistent saving and long-term investments. But first, you have to figure out how much you need in order to set a goal.

Funds to live life to the full in retirement
Retirement is an exciting period in life. You might be looking forward to taking a trip to somewhere you’ve always wanted to go, dedicating more time to a favourite hobby or spending more time with family and friends. However, many people feel concerned about not having the funds to live life to the full in retirement.

Making sure you have enough money to enjoy your retirement is a matter of sensible planning and being proactive. Ask yourself, what decisions can I make today to start preparing for retirement? Investing even small amounts of money on a regular basis in preparation for retirement could leave you with a larger nest egg.

Head start on a retirement nest egg
Investing for growth is suited to those who want to get a head start on a retirement nest egg but won’t be retiring until further into the future. If your goal is to invest for growth, this means that you are more focused on growing your initial investment over a medium-to-long period of time (five years plus) and do not intend to use the investment to boost your current monthly income. For those investing for growth, investing as far in advance as possible from when they plan to start withdrawing the investment should give their funds the best chance of maximum growth.

Investing for income
This investment goal is designed to generate a bit of extra money now and in the future by providing a boost to your monthly income. This goal could be suitable for those closer to retirement who are looking for their investment to help with paying regular bills and outgoings in retirement. When investing for income, selecting investment trusts focused on asset classes including equities and commercial property can provide a reliable and attractive income boost.

A time when you have stopped working
Setting up a retirement goal requires you to find out how much income you’ll need when you have stopped working. As part of the planning process, you’ll need to consider answers to questions such as: ‘At what age do you plan to retire?’, ‘How many years should you plan to be in retirement?’ and ‘What is your desired monthly income during retirement?’

Your retirement fund needs certainty – you can’t risk losing your savings because you need it as a stable income. So how can one balance the need for growth with certainty of returns when building a retirement fund?

The key lies in considering a number of different factors:

Risk appetite
Are you a ‘conservative’ investor who cannot afford to lose the initial capital you put up? Can you sacrifice the certainty of having your investment protected in order to gain higher potential earnings?

If you do not already have a large sum of retirement savings, you probably shouldn’t take too much risk when you invest since you may not have the luxury of time to recoup the losses should your investment turn awry.

Timescales
Generally, a bigger portion of your retirement portfolio can be apportioned to higher-risk investments if you start in your twenties. As you progress nearer towards the retirement years, your portfolio should increasingly focus on investments that are a lower risk and provide more stable returns.
You can consider allocating your investments into products suitable for different investment horizons (short, medium and longer term) depending on your risk appetite. For example, a short-term investment can include some risker assets such as single equities or investing in a fast-growing speciality fund. You should always be reminded that with higher expected returns come higher risks.

Inflation
If you choose to save your way to retirement by putting cash in a savings account, the value of your money may be eroded due to inflation. In order to ensure that the money you have now preserves its purchasing power during your retirement years, you need to choose savings or investments that give you higher returns above inflation.

Diversification
The key to growing your retirement fund includes having different asset classes in your portfolio, which is otherwise known as ‘diversification’. Diversification not only helps you manage the risk of your investments, but it also involves re-balancing your portfolio to maintain the risk levels over time.

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.

PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO 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.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

Treasury enjoying a tax bonanza from pension withdrawals

Following changes introduced in April 2015, you now have more choice and flexibility than ever before over how and when you can take money from your pension pot.

You can use your pension pot(s) if you’re 55 or over and have a pension based on how much has been paid into your pot (a ‘defined contribution scheme’). Whether you plan to retire fully, to cut back your hours gradually or to carry on working for longer, you can now decide when and how you use your pension and when you stop saving into it to fit with your particular retirement journey.

Flexible payments
HM Revenue & Customs (HMRC) has published its update on flexible payments from pensions. This confirms that 585,000 withdrawals were made by 258,000 people in quarter 3 2018, with total withdrawals in this quarter of nearly £2 billion. In the three-and-a-half years of pension freedoms, nearly 5 million withdrawals have been made by over 1.3 million people, totalling £21.6 billion (April 2015–October 2018).

You can use your existing pension pot to take cash as and when you need it and leave the rest untouched where it can continue to grow tax-free. For each cash withdrawal, normally the first 25% (quarter) is tax-free, and the rest counts as taxable income. There might be charges each time you make a cash withdrawal and/or limits on how many withdrawals you can make each year.

Multiple withdrawls
Withdrawing money from pensions following the introduction of the freedoms shows no signs of abating. Quite the opposite, in fact, as the latest official figures show that the Treasury expects to receive an additional £400 million[1] in tax receipts from flexible pension withdrawals this year. Cashing in your pension pot will not give you a secure retirement income, and you should obtain professional advice if you are considering this option.

The findings show that typically smaller pensions are being fully withdrawn, while people with larger pensions are making multiple withdrawals in a tax year, suggesting they are treating their pension more like a bank account. These pensions are also being accessed for the first time before State Pension age. People accessing their cash also need to ensure they are not paying more tax than they need to.

Tax bonanza
This combination of taking multiple withdrawals in a tax year at earlier ages, when people are still likely to be earning income from work, means many people are likely to be paying more tax than if they took withdrawals more gradually. The Treasury is enjoying a tax bonanza, as predictions that paying Income Tax would be a natural brake on withdrawals hasn’t stopped people simply taking the money.

HMRC also confirmed that around £38 million has been refunded in overpaid tax following the application of emergency tax rules on pension withdrawals in the last quarter (1 July–30 September 2018), as many people continue to overpay at the point of withdrawal.

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.

PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO 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.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

The end of the tax year on 5 April is fast approaching, so make sure you’ve made the most of your annual allowances before it’s too late. No matter what, why or how you want to save and invest, an Individual Savings Account (ISA) could help make your money work harder for you.

ISAs are tax-efficient wrappers. Every tax year, we each have an annual ISA allowance. If you don’t take full advantage of using all or part of it in one tax year, you cannot carry it over to the next.

There are various tax advantages to saving or investing through an ISA: you don’t pay Capital Gains Tax on any capital growth nor Income Tax on any income received, either as interest or dividends, from the investment or cash savings. Another advantage is that you don’t have to declare ISAs on your tax return.

Types of ISA and their allowances
There are currently six different types of ISA.

Cash ISA
Anyone over the age of 16 can put their cash savings into a Cash ISA. Accounts can be either instant access, have notice periods or have fixed terms.

The annual allowance for a Cash ISA is £20,000 (tax year 2018/19). You can invest up to this full amount in your Cash ISA, or you can share this allowance between the different types of ISA, with the exception of the Help to Buy ISA.

Stocks & Shares ISA
A Stocks & Shares ISA is a medium-to-long-term investment (five years or more). Anyone over the age of 18 can put individual shares or managed funds into a Stocks & Shares ISA. It enables you to decide how much risk you are prepared to take when investing, offering access to a range of funds and the potential for better returns than a Cash ISA over the long term.

The annual allowance for a Stocks & Shares ISA is £20,000 (tax year 2018/19). Again, you can invest up to this full amount in your Stocks & Shares ISA, or you can share it between the other types of ISA.

Innovative Finance ISA
This ISA is for investments in peer-to-peer lending platforms. You must be over the age of 18 to invest.

The annual allowance for an Innovative Finance ISA is £20,000 (tax year 2018/19). Once again, you can invest up to this full amount in your Innovative Finance ISA, or you can spread it out between various types of ISA.

Help to Buy ISA
Help to Buy ISAs are available to each first-time buyer, not each home. This ISA has been introduced to help first-time buyers over the age of 18 get on the property ladder. You have to choose between either a Cash ISA or a Help to Buy ISA, but you can have a Help to Buy and a Stocks & Shares ISA in the same tax year.

The Government will top up any contributions you make by 25%, up to the contribution limit of £12,000. So, for every £200 you save, the Government will contribute £50. This means you can earn a maximum of £3,000 from the Government. So, if you’re buying a property with your partner, for example, you’ll be able to get up to £6,000 towards your deposit.

The minimum amount you need to save to qualify for a government bonus is £1,600 (which gives you a £400 bonus). You can start off your ISA with an initial deposit of up to £1,000, which also qualifies for the 25% boost from the Government.

Another important factor is that the proceeds can only be used to buy a property worth up to £250,000 outside of London, and up to £450,000 within London.

Lifetime ISA
The Lifetime ISA is similar to the Help to Buy ISA. It is designed to help investors between the ages of 18 and 39 save for either a first house purchase or their retirement. Once you have a Lifetime ISA, you can continue to contribute until the age of 50.

You can put a maximum of £4,000 into a Lifetime ISA each tax year and are paid a 25% bonus from the Government. The bonus is paid in monthly instalments, and the maximum bonus you can earn in a tax year is £1,000.

The amount you pay in is linked to your annual ISA allowance (£20,000 for 2018/19). For example, if you pay £1,000 into your Lifetime ISA, you can still pay £19,000 into other ISA products. It is possible to hold both a Help to Buy ISA and a Lifetime ISA, but you will not be able to use both bonuses for a first-time house purchase.

Another differentiator between this type of ISA and the Help to Buy ISA is that the proceeds can be used to purchase a property worth up to £450,000 regardless of its location.

Junior ISA
Cash or investments can be wrapped in this ISA on behalf of children under the age of 18. Anyone can invest in the Junior ISA – parents, grandparents or friends. The money belongs to the child, and they can access it when they reach 18 years of age. The Junior ISA has an annual allowance of £4,260 (tax year 2018/19). You must be a UK resident or crown employee to invest in any type of ISA.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.