Gender disparity

Funding a post-work life will be difficult without sufficient planning

A new report has revealed a huge gender disparity when it comes to pension savings and income, indicating that funding retirement is likely to be a significant challenge for many women.

According to the annual ‘State of Retirement’ report by LV=, women who have occupational or private pensions reach retirement with pots worth on average £107,000. This is almost half that of men who, on average, retire with a fund worth £201,000.

Potential difficulty
The potential difficulty facing women is highlighted by the fact that one in four (23%) women approaching retirement have only the State Pension to rely on, compared to just 9% of men. As fewer women have pension savings, the income gap is even wider if we look across the genders at all those approaching retirement. This sees the average woman’s private pension at retirement fall to just under £10,000, which is less than a tenth of the equivalent average male pension pot (£131,000).

Income gap
However, that’s not to say it is all plain sailing for men. The report reveals that, regardless of gender, funding a post-work life will be difficult. The findings uncover a gap between the level of income those approaching retirement say they need and what they can expect. Indeed, although those nearing retirement say, on average, that they will need at least £14,352 a year to meet essential expenses, they can actually expect just £10,590 a year from their private and State Pension combined – a shortfall of £3,744 a year[1].

Burden of debt 
For many, this problem is heightened by the burden of debt and family dependencies now following them into retirement. Currently, 4.3 million retirees have some form of debt in the form of a mortgage (1 million) or outstanding credit card debt (2.5 million). Over a third (4.4 million) of retirees have given financial help and support to family members, mainly children, in the last 12 months. The figures also reveal that 1 in 50 over-50s plan to take their pension as a lump sum to pay off debts.

Retiring later
These financial concerns, coupled with the fact that people are spending longer in retirement, have caused many to reconsider their retirement plans. Nearly a quarter (22%) of over-50s say that they now plan to retire later than previously considered, while 1.6 million over-50s don’t think they’ll ever stop working. The findings also show that one in five (18%) over-50s who had retired have since re-entered the workplace.

Alive and well 
It is clear that some people have returned to work because they need to. However, for others, the adage that ’60 is the new 40′ is alive and well, with one in four (23%) retirees re-entering the workplace because they wish to keep working. One of the main reasons for this is a desire to keep active and make use of the skills they have spent a lifetime honing; the other is the social aspect of being at work.

Pensions freedom 
The recent pensions freedom changes that commenced on 6 April now offer retirees the chance to make more of their pension pot by selecting alternatives to standard annuities and potentially combining annuities with income drawdown. However, there is confusion among over-50s around what the new rules mean. Only a fifth (23%) claim to have a good understanding of the reforms, while a further third (33%) have little or no understanding at all. One in ten (12%) over-50s are completely unaware of any pension freedom changes, resulting in the fact that many could miss out on the chance to improve their income in retirement.

Source data:
The State of Retirement research was carried out by Opinium Research from 27-30 January 2015. The total sample size was 1,518 British adults over 50 and was conducted online. Results are weighted to a nationally representative criteria.
[1] According to the research by Opinium, 879 over 50s (those not retired) people were questioning how much money they thought they would need in retirement per week, as a bare minimum. The mean answer was £276 (equivalent to £14,352 per year).
According to research by the Centre for Economics and Business Research (CEBR) carried out for the report, the average retiree has £73,100 in private pension wealth upon retirement. An average annuity for a male or female smoker retiring with this sum would pay £4,709 a year. With the State Pension (£5,881), this brings the total income to £10,590 a year or £204 a week, i.e. £3,744 less per year or £72 less per week than the minimum standard.

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.

A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND UPON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATION.

Taking preventative action

Reducing your beneficiaries’ potential Inheritance Tax bill or mitigating it out altogether

With careful planning and professional financial advice, it is possible to take preventative action to either reduce your beneficiaries’ potential Inheritance Tax bill or mitigate it out altogether.

1. Make a Will
A vital element of effective estate planning is to make a Will – unfortunately, a significant number of adults with children under 18 fail to do so. This is mainly due to apathy, but also a result of the fact that many of us are uncomfortable talking about issues surrounding our death. Making a Will ensures your assets are distributed in accordance with your wishes.

This is particularly important if you have a spouse or partner, as there is no IHT payable between the two of you, but there could be tax payable if you die intestate – without a Will – and assets end up going to other relatives.

2. Make allowable gifts 
You can give cash or gifts worth up to £3,000 in total each tax year, and these will be exempt from Inheritance Tax when you die.

You can carry forward any unused part of the £3,000 exemption to the following year, but then you must use it or lose it.

Parents can give cash or gifts worth up to £5,000 when a child gets married, grandparents up to £2,500 and anyone else up to £1,000. Small gifts of up to £250 a year can also be made to as many people as you like.

3. Give away assets
Parents are increasingly providing children with funds to help them buy their own home. This can be done through a gift, and, provided the parents survive for seven years after making it, the money automatically ends up outside their estate for IHT calculations – irrespective of size.

4. Make use of trusts 
Assets can be put in trust, thereby no longer forming part of the estate. There are many types of trust available, and they usually involve parents (called ‘settlors’) investing a sum of money into a trust. The trust has to be set up with trustees – a suggested minimum of two – whose role is to ensure that on the
death of the settlors, the investment is paid out according to the settlors’ wishes. In most cases, this will be to children or grandchildren.

The most widely used trust is a ‘discretionary’ trust, which can be set up in a way that the settlors (parents) still have access to income or parts of the capital.

It can seem daunting to put money away in a trust, but they can be unwound in the event of a family crisis and monies returned to the settlors via the beneficiaries.

5. The income over expenditure rule 
As well as putting lump sums into a trust, you can also make monthly contributions into certain savings or insurance policies (not Individual Savings Accounts) and put them in trust.

The monthly contributions are potentially subject to IHT, but if you can prove that these payments are not compromising your standard of living, they are exempt.

6. Provide for the tax 
If you are not in a position to take avoiding action, an alternative approach is to make provision for paying IHT when it is due.

The tax has to be paid within six months of death (interest is added after this time).

Because probate must be granted before any money can be released from an estate, the executor – usually a son or daughter – may have to borrow money or use their own funds to pay the IHT bill.

This is where life assurance policies written into an appropriate trust come
into their own. A life assurance policy is taken out on both a husband’s and wife’s life, with the proceeds payable only on second death.

The amount of cover should be equal to the expected IHT liability. By putting the policy into an appropriate trust, it means it does not form part of the estate.

The proceeds can then be used to pay any IHT bill without the need for the executors to borrow.

Wealth creation

The first step to building wealth starts with a disciplined decision to pay yourself first, then compounds with a disciplined investment approach.

 

When you define your investment objectives, the priority of where and how to invest should be guided by your specific goals. It should also naturally encourage you to do more as you see it working—encouraging you to further increase, grow and build your wealth. We can help you secure the financial future that you want to achieve and your lifetime goals, enabling you to structure your finances as tax-efficiently as possible.

There are many different ways to grow your wealth, from ensuring you receive the best rates for short-term cash management, to the more complex undertaking of creating an investment portfolio to grow your wealth for the long-term.

A properly crafted wealth management strategy allows you to make informed decisions about the investment choices that are right for you, by assessing your life priorities, goals and attitude towards risk for return.

To discuss your requirements or for further information, please contact us – we look forward to hearing from you.