Free advice

An editorial by Which? magazine in June 2018 

Can I get free advice at retirement? 

If you’re unwilling or unable to pay for financial advice, you can get free guidance, in some cases ‘personalised guidance’, from a number of government-provided services – Pension Wise, The Pensions Advisory Service (TPAS) and the Money Advice Service. Which? used undercover fieldworkers to make a number of calls to the services in June 2018 asking for assistance with plans to cash in a £100,000 pension to pay off an outstanding mortgage and to consolidate three pensions into a single plan. 

Pensionwise 

Pension Wise was set up in 2015 to coincide with the introduction of the so-called pension freedoms. You can have a conversation over the phone (which we opted to do) or face-to-face, but you must be over the age of 50 and have a defined contribution pension. Despite the current eight-week wait for an appointment, our mystery shoppers eventually dealt with well-informed call handlers who asked personal questions and then covered the chosen retirement option in detail. The calls follow the same broad format, lasting about 45 minutes – questions about the consumer’s finances, health, family situation and pension provision , followed by points to consider with the preferred option, and finally an overview of the alternatives . In our scenario, the call handlers had some insightful observations about the tax liability if you take a pot in one go, even working out how much exactly you would pay in tax, and also gave clear warnings about potential scams. 

The Pensions Advisory Service 

Callers to The Pension Advisory Service (TPAS) can get straight through to someone to discuss their question. Our first call about cashing in the pension was fairly succinct, with the caller told to contact her pension provider, phone Pension Wise or seek financial advice. The other telephone call was more productive, with tax implications discussed and the dangers of having no alternative retirement income highlighted. Conversations about pension consolidation were again quite brief. However, some key considerations around the flexibility gained by keeping the pots separate, the potential loss of benefits and possible transfer penalties were outlined by TPAS . A point about managing separate pots effectively in the post-2015 world was particularly insightful. 

The Money Advice Service 

The Money Advice Service covers all financial issues, with phone menu options for debt, pensions, benefits, home/mortgages and ‘other’. If you choose pensions, you’re connected to someone at TPAS. We chose the mortgages option and explained we wanted to pay off our home loan by cashing in a pension. Speaking to a financial adviser was immediately suggested and some help given to find one. By their nature, the guidance services featured above will have their limitations. Call handlers can outline options and provide impartial guidance (sometimes ‘personalised’ to reflect your individual circumstances), but they can’t provide financial advice or recommend specific products.

Should I pay for financial advice? 

While the costs may seem high, paying for professional advice could be an invaluable investment – especially if you have little experience investing. A financial adviser has the tools and experience to help you plan for a future without work and make sure your savings last throughout your retirement. 

When should I see an adviser? 

An adviser can add value when you’re considering complex products, such as pension drawdown or investments, or significant decisions in life, such as retirement or arranging care, and don’t have the time, knowledge or confidence to make decisions yourself.

Source: Which?

Income tax brackets

Current rates and allowances

How much Income Tax you pay in each tax year depends on:

• how much of your income is above your Personal Allowance

• how much of your income falls within each tax band

Some income is tax-free.

The current tax year is from 6 April 2019 to 5 April 2020.

Your tax-free Personal Allowance

The standard Personal Allowance is £12,500, which is the amount of income you do not have to pay tax on.

Your Personal Allowance may be bigger if you claim Marriage Allowance or Blind Person’s Allowance. It’s smaller if your income is over £100,000.

Income Tax rates and bands

The table shows the tax rates you pay in each band if you have a standard Personal Allowance of £12,500.

Income tax bands are different if you live in Scotland.

Band Taxable income Tax rate Personal Allowance Up to £12,5000%Basic rate£12,501 to £50,00020%Higher rate£50,001 to £150,00040%Additional rate over £150,000 45%

You can also see the rates and bands without the Personal Allowance. You do not get a Personal Allowance on taxable income over £125,000.

If you’re employed or get a pension

Check your Income Tax to see:

• your Personal Allowance and tax code

• how much tax you’ve paid in the current tax year

• how much you’re likely to pay for the rest of the year

Other allowances

You have tax-free allowances for:

• savings interest

• dividends, if you own shares in a company

You may also have tax-free allowances for:

• your first £1,000 of income from self-employment - this is your ‘trading allowance’

• your first £1,000 of income from property you rent (unless you’re using the Rent a Room Scheme)

Find out whether you’re eligible for the trading and property allowances.

You pay tax on any interest, dividends or income over your allowances.

Paying less Income Tax

You may be able to claim Income Tax reliefs if you’re eligible for them.

If you’re married or in a civil partnership

You may be able to claim Marriage Allowance to reduce your partner’s tax if your income is less than the standard Personal Allowance.

If you do not claim Marriage Allowance and you or your partner were born before 6 April 1935, you may be able to claim Married Couple’s Allowance.

Income over £100,000

Your Personal Allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. This means your allowance is zero if your income is £125,000 or above.

You’ll also need to do a Self Assessment tax return.

If you do not usually send a tax return, you need to register by 5 October following the tax year you had the income.

You’ll get a letter telling you what to do next after you’ve registered.

Source: ukgov

Nine million UK mid-life employees flying blind into retirement

 8.9 million employees aged 45 and over do not know how much they will need to save for a comfortable retirement while 5.1 million do not know how much they have already saved in their pension.

•  Mid-life employees are calling on their employer for more support.

• Aviva analysis shows it’s never too late to save, with the average UK employee aged 45 potentially able to generate a pension pot of more than £50,000 by the time they retire at 65 from a standing start.

Millions of mid-life UK employees are sleepwalking into retirement, according to new research from Aviva UK.

The study, which looked into mid-life employees’ financial preparedness for later life, revealed 64% of employees aged 45 and over - the equivalent of nearly nine million people - do not know how much they will need to save to afford a comfortable retirement.

In addition, over five million mid-life employees (37%) do not know how much is already saved in their pension. Question marks also hang over the state pension with two in five (43%) respondents unaware of how much support they will receive from government. A further 26% do not know at what age they’ll be eligible for the state pension.

With the full new state pension currently valued at £168.80 per week, this adds up to a retirement income of £8,777.60 per year.

Table 1: Percentage of employees aged 45+ that do not know the following information

		% of UK employees aged 45+		Number of UK employees aged 45+
The age at which I will qualify for the state pension		26%		3.6m
How many pension pots I have		35%		4.9m
How much I have currently saved in my private pension(s), if anything		37%		5.1m
What type of private pension scheme I have		37%		5.1m
How much my employer contributes towards my current private pension		36%		5m
The state pension provision		43%		6m
What the pension freedoms mean for me		62%		8.6m
How much I need to save before I can retire comfortably with the lifestyle I want		64%		8.9m

Most employees (62%) aged 45+ do not know what the pension freedoms mean for them, while 37% do not know what type of pension scheme they have – for example whether it’s a defined contribution or defined benefit scheme.

Never too late to save

However, the analysis also highlights it is never too late to save. Based on the average UK salary of £28,000, Aviva calculates that an employee aged 45 today with no savings to date could build a pension pot of £56,100 by the time they reach 65, based on the current minimum employee and employer pension contributions under auto-enrolment alone (a combined 8% of annual pensionable earnings). 

Table 2: Projected value of savings for average employee by retirement age of 65

* It’s important to note that these figures are based on assumed charges and rates of growth, which are not guaranteed. The value of investments can go down as well as up and employees may get back less than has been paid in.

Starting age Amount saved by Amount contributed Projected value of

employee (5%) by employer (3%) pension @ 65 Invest. Growth 2.4%

45 £21,840 £13,200 £56,100

50 £16,380 £9,900 £39,600

55 £10,920 £6,600 £25,500

60 £5,460 £3,300 £13,600

Employers seen as an important source of financial guidance

Most employees surveyed see their employer as a critical source of financial help in navigating the uncertainty around their pensions, with two thirds (65%) believing their employer should provide support around employees’ pensions.

Lindsey Rix, Managing Director of Savings and Retirement at Aviva comments: 

“Millions of mid-life employees are flying blind, and fast, towards their retirement. At the same time these employees are calling upon their employers for help.

Without a clear picture of what they currently have saved or might need to save for a comfortable retirement, our findings show many UK employees are approaching retirement with their eyes closed – with no realistic idea of how near or far they are from their destination. “As a first step, mid-life employees who are mystified by their pension savings should try to get a clear picture of what they have saved so far and how much of an income this can provide them with over the course of retirement.

For some, this may be a pleasant surprise, while for others, it could be the wake-up call that’s needed to spur them to take action. People whose pensions are in need of a boost shouldn’t be disheartened, however, as it’s never too late to save.”

Top tips to help demystify pensions for mid-life employees:

• Understand where you start – before considering your plans for tomorrow it’s important to understand where you stand today. Look into your current pension savings and policy and research when you’ll be eligible for the state pension, and how much support you’ll receive
  

• Take advantage of your workplace pension – all employers are legally required to provide a workplace pension, if we save, our employer must save with us too
  

• Track down your pensions – moving jobs more frequently means amassing more pension pots. It can be hard to keep track of different pots, however the government offers a pension tracing service to help you track down any mystery pots
  

• Take advantage of online planning tools - Aviva’s Shape my Future tool can give you an idea of what your retirement income might be based on your current saving habits and let you see the possible effects of making changes
  

  Find out if there’s financial guidance available at your workplace - many employers offer employees sessions with financial advisers, it’s therefore worth checking if your employer already has these initiatives in place. Some organisations such as Aviva have introduced Mid-Life MOTs for their employees, to help employees in this age group to consider their wealth alongside their work and well being

• Take professional financial advice - as the decisions you make at this time are of paramount importance to your future lifestyle.

Source: Aviva

Fees and commissions bias

Guide to financial adviser fees

Wondering how much financial advisers charge? It depends on a number of things, including your specific needs and the firm you decide to hire.

• Financial adviser fees vs commission

• How much does a financial adviser charge?

• What can affect a financial adviser’s fees

  The end of commission-bias

Financial adviser fees vs commission

Since 2013 advisers cannot be paid a commission if they give you advice about:

• Pensions

• Investments

• Retirement income products such as annuities

Instead they must charge you a fee for the advice.

However, if you’re getting advice on: mortgages, equity release, general insurance (like travel or home insurance) or protection insurance, such as term life insurance, advisers can still be paid commission.

At the end of the day, in both cases you are effectively paying for advice.

Either by paying a fee, or by purchasing a costlier product that gives the financial adviser commission.

How much does a financial adviser charge?

Many financial advisers offer an initial meeting free of charge. This isn’t designed to give you specific advice about your situation. It’s a chance to see how they work, how much they charge and to get a sense of whether you feel comfortable with them.

A financial adviser’s fees vary depending on what they are charging you for and how you pay.

Some advisers offer different ways that you can pay for advice.

If there is a particular option you prefer, ask the adviser as they might be happy to negotiate. These include:

• An hourly rate - this will vary from £75 an hour to £350, although the UK average rate is about £150 an hour

• A set fee for a piece of work - this could be several hundred or several thousand pounds

• A monthly fee - this could be a flat fee or a percentage of the money you want to invest

• An ongoing fee - an adviser can only charge you an ongoing fee in return for providing an ongoing service, unless you’re paying off an initial charge over time through a regular payment product

Make sure it works for you

It’s a good idea to find out whether you can choose different ways of paying for different services.

For example, paying an hourly rate for advice about your pension, but a percentage for advice about your investments.

Try to find a system that suits you.

Your adviser must give you a copy of their charging structure before providing any services to you.

They should also tell you how much the service you need will cost, or at least give you an estimate.

What can affect a financial adviser’s fees

The fees that financial advisers charge vary.

There are several factors that could affect how much an adviser charges:

• Location - some advisers might be based in a more expensive part of the UK, which means their office costs will be much higher

• How the service is delivered - some firms now offer advice by phone or even online, which can mean the cost of the advice is cheaper as they have lower overheads. However, if you’re receiving advice this way, make sure that it comes with a recommendation that’s specific to you so you’re fully protected

• Who does the work - some financial advice firms will use a highly-qualified adviser for all the work whereas another firm might use support staff to do some of the work (signed off by an adviser) which will cost you less

• How well qualified a financial adviser is - the more qualifications and experience an adviser has, the higher their fees might be. Depending on the type of advice you’re looking for, you might feel that paying for an adviser who is highly qualified is worthwhile

• How complex your situation is - if there’s a lot of sorting out to do, this can take time and time is money. You can help by being very clear about the type of advice you need and having your papers in good order. Any sorting out you can do in your own time you won’t have to pay for. Only use your adviser to do the things that you can’t do yourself and to provide the expert advice

The end of commission-bias

The Financial Services Authority (FSA) confirmed its pledge to ban commission on investment products by the end of 2012.

In a retail distribution review discussion paper published on 26 March, the City watchdog said it would ban financial advisers from taking commission from providers when recommending products.

Instead, advisors would have to be upfront about how much they charge for their services and give recommendations based on a comprehensive and unbiased analysis of the market.

"These new rules were designed to boost confidence and trust in the retail investment market by removing commission bias, actual or perceived, and exploding the myth that investment advice is free," said Sheila Nicoll, the then director of the FSA.

When the review rolled into action in 2012, investors were given the choice of paying an upfront fee or they can bundle the cost of advice with the cost of the product and spread out the payments.

It was unclear how exactly the bundling of advice and product fees would operate.

However, more needs to be done to help people who cannot afford to pay for full financial advice: It is clear that the changes meant that full advice services moved further up market, meaning that even more consumers need an alternative advice option.

These changes removed the influence of commissions on advisers’ recommendations. 

Personal pensions

Who might consider setting up a personal pension?

• the self-employed

• someone without a workplace pension

• someone who lives off their partner’s earnings but wants their own pension

• or someone who wants to make additional pension provisions

What is available and what can i do?

1. personal pension plan?

2. stakeholder pension?

3. SIPP?

4. Can I pay into both a workplace pension and a personal pension?

5. Can I take contribution holidays?

Personal pension plans

A personal pension is any pension scheme you can join yourself that is not a workplace pension (nor the state pension). However, the term can be a little confusing, as there are three main types of personal pension – one of which is simply called a ‘personal pension scheme’!

The three types are:

• Personal pension schemes

• Stakeholder pension schemes

• Self-invested personal pension plans (SIPPs)

The one thing all of these pensions have in common is that they are defined contribution schemes, otherwise known as money purchase schemes. This means you save up a pot of money which is invested in a fund, and which you can access from the age of 55 onward.

There are however some important differences between these types of scheme, which you should take into account when choosing which one might be for you.

What is a personal pension plan?

A personal pension plan is a pension that you set up yourself with the pension provider (usually an insurance company). You can have a personal pension whether or not you work, and other people can contribute to it. For example, if your spouse is the sole earner in your household but you want to have your own pension, you can set up a personal pension for your spouse to pay into.

If you are employed, you can request that your employer pays into your personal pension instead of your workplace pension. You may prefer this if you move jobs, or your act as a contractor or freelancer regularly and don’t want to keep joining different pension schemes.

The money you contribute to a personal pension can be invested in a wide range of assets and funds, just like a workplace pension. This should generate growth over time, building up a pot of money that you can access from the age of 55. 

A personal pension scheme will charge you an annual fee, usually a percentage of your pension pot (which is taken automatically). Fees are often a bit higher than those for workplace pensions but are typically around 1.5% of the value of the fund sometimes slightly higher.

As with all defined contribution schemes, the value of the scheme at retirement will depend on how much you have contributed and the investment growth on those contributions.

What is a stakeholder pension?

A stakeholder pension is similar in most respects to a standard personal pension. However, there are some key differences.

Differences between a personal pension and a stakeholder pension

• A stakeholder pension may have lower annual fees than a personal pension, as these are limited by law to 1.5 percent of pot size for the first 10 years, and 1 per cent after that. Personal pension fees may be higher.

• A stakeholder pension may allow a lower minimum contribution than an ordinary personal pension. By law, the stakeholder pension minimum contribution is just £20 a month.

• A stakeholder pension may offer a narrower range of funds for investing your contributions. This might result in lower growth, but this won’t necessarily be the case.

What is a group stakeholder pension?

Group stakeholder pensions used to be a common kind of workplace pension scheme, and some people still have them. If you are a member of a group stakeholder pension you can carry on contributing to it until you leave that employer, after which time it will become paid up.

What is a self-invested personal pension (SIPP)?

A SIPP is the most flexible kind of personal pension, in that it lets you choose the investments that make up the fund. You can choose from a wide range of asset classes  including equities, investment trusts, commercial properties and government securities. This can make it an attractive option for those who like to take a more active role in investment. You can also appoint a fund manager or financial adviser to handle the investment strategy for you. SIPPs have the potential for higher risk, but also higher levels of growth. They may involve higher management charges too.

Can I pay into a personal pension and a workplace pension at the same time?

You can be a member of any kind of personal pension scheme at the same time as belonging to a workplace pension scheme, and you can pay into both simultaneously if you wish. However, whether or not there is any benefit in doing so will depend on your circumstances. Bear in mind:

• Although there is no limit to the number of pension schemes you can contribute to, there is a limit to the amounts you can save into pensions each year (the annual allowance) and overall (the lifetime allowance). Having more pensions won’t change this. The current annual allowance is £40,000 but this can be different in certain circumstances.

• You’ll get employer contributions on your workplace pension, but not on your personal pension (unless you’re using it instead of your workplace pension, and your employer has agreed).

There are however some reasons why you might want a personal pension in addition to a workplace pension. For example:

• Your workplace pension is a final salary scheme, and does not allow for additional contributions. You might therefore want a personal pension as well to boost your retirement income

• You want to vary your pension contributions from month to month, so you pay a small regular amount into your workplace pension, and a varying amount into your personal pension

Can I take a break from contributing to a personal pension?

With a personal pension, stakeholder pension or SIPP you can take a contribution holiday at any time without any penalty, and restart your contributions when you are able to. This makes them particularly useful for freelancers, contractors and anyone else whose income may fluctuate throughout the year.