The Ride London 100 was a grim affair with rain pouring down for a good 3/4 hours as well as drizzle. At the 40 mile point I had to stop for not only a comfort break but also because I was cold. Having prepared myself for a 35c temp on the day things turned cold. My muscles tightened up and I have to put arm warmers on at the 40 mile point. The visibility was also very poor as my glasses were wet and steamed up from time to time. So no records broken this year. But I did complete it in an official time of 5 hours 52 mins (5 hrs 46mins riding) and raised approx £1,700.
Those who receive financial advice are on average £40,000 better off than those who don’t, a new report has found.
Research, published by the International Longevity Centre and Royal London, found those who received financial advice between 2001 and 2007 accumulated significantly more liquid financial assets and pension wealth than those who didn’t by 2012 to 2014.
The report, called The Value of Financial Advice, examined the impact of advice on two groups: the 'affluent', who are wealthier and more likely to have degrees and be homeowners, and the 'just getting by', who are less wealthy and more likely to be single, rent and have lower education levels.
It found that the 'affluent but advised' accumulated on average £12,363 (or 17 per cent) more in liquid financial assets than the affluent and non-advised group, and £30,882 (or 16 per cent) more in pension wealth, making a total of £43,245.
Meanwhile the 'just getting by but advised' accumulated on average £14,036 (or 39 per cent) more in liquid financial assets than the just getting by but non-advised group, and £25,859 (or 21 per cent) more in pension wealth, bringing a total of £39,895.
Since advice has clear benefits for customers, it is a shame that more people do not use it.
Ben Franklin, head of economics of ageing at ILC-UK, said: “The advice market is not working for everyone.
“A high proportion of people who take out investments and pensions do not use financial advice, while only a minority of the population has seen a financial adviser."
“Since advice has clear benefits for customers, it is a shame that more people do not use it."
“The clear challenge facing the industry, regulator and government is therefore to get more people through the ‘front door’ in the first place.”
The report also finds that financial advice led to greater levels of saving and investment in the equity market.
The 'affluent but advised' group were 6.7 per cent more likely to save and 9.7 per cent more likely to invest in the equity market than the equivalent non-advised group.
Of the ‘just getting by but advised’ group 9.7 per cent were more likely to save and 10.8 per cent more likely to invest in the equity market than the equivalent non-advised group.
Those who had received advice in the 2001 to 2007 period also had more pension income than their peers by 2012 to 2014.
The 'affluent but advised' group earned £880 (or 16 per cent) more per year than the equivalent non-advised group while the 'just getting by but advised' group earned £713 (or 19 per cent) more a year.
This powerful research shows for the first time the very real return to obtaining expert financial advice.
Sir Steve Webb, director of policy at Royal London and former pensions minister, said: “This powerful research shows for the first time the very real return to obtaining expert financial advice.
“What is most striking is that the proportionate impact is largest for those on more modest incomes."
“Financial advice need not be the preserve of the better off but can make a real difference to the quality of life in retirement of people on lower incomes as well.”
Learn about the relationship between risk and retirement and how that has changed with pension freedoms.
Understand why retirees tend to be risk averse and how this can be overcome.
Grasp what the FCA concluded about risk and how advisers can incorporate this into the advice process.
The Financial Conduct Authority's (FCA’s) recent Retirement Outcomes Review Final Report mentions the word ‘risk’ 63 times.
The report talks about longevity risk, the risk of scams and the risk of overspending, but the dominant theme is arguably the risk of over-cautious investors (mainly those without the benefit of advice) losing out by holding too much cash.
The paper sends a strong signal about the need to challenge clients’ inherent caution in later life.
It arguably also sounds another death knell for lifestyling funds that automatically take risk off the table as the investor approaches their retirement date.
Breaking with tradition
In the days when nearly everyone bought an annuity, retirement represented the point at which you converted your pension savings into a guaranteed income for the rest of your life.
In that scenario, and with gilts also offering inflation-beating returns, there was some logic to the long-held tradition of gradually moving out of risk assets as you neared this important cut-off date.
But times have changed. Quantitative easing has made bonds look decidedly risky. Pension freedoms and longevity have forced a rethink of old traditions.
Back in 1980, when a man retiring at 65 could expect 13 years of retirement, a 15 per cent annuity was possible.
Research shows that in most circumstances, investors are better off leaving more of their portfolios in equities at and into retirement than they might have done traditionally.
Today, when that life expectancy has stretched 40 per cent to more than 18 years, the same annuity packages now generate less than 5 per cent a year.
Little wonder so many people are opting for drawdown – the FCA paper says twice as many pots are being used for drawdown than to buy an annuity since the pension freedoms.
But the longevity challenge that has contributed to the collapse of annuity rates remains for those in drawdown too.
There is now substantial evidence to suggest that the only way for many investors to make their money stretch throughout the whole of their retirement is to embrace a degree of investment risk.
Research shows that in most circumstances, investors are better off leaving more of their portfolios in equities at and into retirement than they might have done traditionally.
The reason is simple: people tend to be at their wealthiest as they near retirement age. This is the point at which their portfolios are at their biggest and the power of compounding has the most benefit.
For most people, this is not the time to be taking a foot off the risk pedal.
One of the most important pieces of research in this area was conducted by Robert Arnott, chief executive of Research Affiliates in California.
In his landmark 2012 paper, The Glidepath Illusion, Mr Arnott simulated the performance of three distinct retirement strategies on the basis of more than 140 years of historical returns.
He offered three characters on the ‘glidepath’ to retirement – Prudent Poly, whose stock- bond allocation progressively moves from 80-20 to 20-80; Balanced Burt, whose stock-bond allocation is rebalanced annually to a static 50-50; and Contrary Connie, whose stock-bond allocation progressively moves from 20-80 to 80-20.
According to Mr Arnott, assuming an annual investment of $1,000 (£784.70) over 40 years, on average, Polly could expect to enter retirement with around $124,000, Burt with $138,000 and Connie with $152,000.
Crucially, the worst case scenarios showed a similar pattern. In the worst outcomes experienced over 140 years of historic returns Polly would end her working life with just $50,000, Burt with $52,000 and Connie with $53,000.
Many others have corroborated this research. In 2017, I carried out a similar study to explore how far retirement savings might last in a range of scenarios.
In this study, two investors (and admittedly this is not a hard luck tale – these would be high-net-worth individuals) save an average of £20,000 a year from the age of 30 to 60, retire and then set about withdrawing an annual pension of £60,000 a year.
But having also modelled much more modest scenarios, the conclusions drawn below in terms of the risk reward trade-off are consistent whether you save £20,000 or £2,000, and draw £60,000 or £6,000.
One invests throughout in a moderately cautious portfolio generating 4 per cent per annum on average (after advisory fees and miscellaneous costs), the second targets 5 per cent per annum through a balanced portfolio.
The cautious investor runs out of money at nearly 86, by which point the balanced investor still has £800,000 in savings.
The comforting conclusion is that it only takes a modest increase in risk to generate significantly better returns.
This was a simple model – it assumed the portfolios were kicking out exactly 4 per cent and 5 per cent a year.
Not very realistic, you might argue.
Subjecting them to the vicissitudes of normal markets using real-life market data that included the market crash of 2008 to 2009 aimed to address that issue.
Taking a ‘bad’ scenario (on a scale of one to 100 of outcomes, where one was the best and 100 was the worst, this was number 80 on the scale), the cautious investor ran out of cash at around 80; the balanced investor ran out of money at 84.
Caution still did not pay.
We dialled up the gloom even further, this time assuming both investors had been taking the same levels of risk all their lives, so they started out with the same pot of money at 60.
Then we plugged in the 90th centile – ‘really bad’ – market data. Both investors ran out of money at roughly the same time – when they were 80.
No need to be reckless
The comforting conclusion is that it only takes a modest increase in risk to generate significantly better returns – in our research it was one step up the risk ladder, from moderately cautious to balanced.
This is helpful because an adviser may have to nurse a client to an uncomfortable conclusion – they may be inclined towards caution, but cannot afford it.
There are several drivers of this caution. The obvious one is that it is not as easy in retirement to go back to work to make up investment losses.
But we must also contend with what you might call ill-informed optimism and misguided pessimism.
Firstly, the optimism. Seven Investment Management's annual survey research consistently shows that investors looking at the size of their pension pot overestimate by about 100 per cent how much income it will generate, or how long it will last.
As for the pessimism, that is human instinct according to Nobel Prize winners Daniel Kahneman and Amos Tversky, who developed the concept of ‘prospect theory’.
Supported by an array of studies in the fields of psychology and experimental economics, the concept posits that we place more emphasis on avoiding losses than on acquiring gains – losses hurt roughly twice as much as gains feel good.
This leads to another dangerous tendency.
Rather than evaluate the expected range of returns for a lower risk portfolio alongside those of a higher risk portfolio, our natural loss aversion leads us to instinctively contemplate what the likely return from a lower risk portfolio might be and then contrast it to what we could face if something utterly terrible were to happen with a higher risk portfolio.
This perhaps explains why the FCA found so many consumers ending up with investments that were not right for them, including in cash – and why those who struggled most with this were those without the benefit of professional advisers.
Overall, 33 per cent of non-advised drawdown consumers are wholly holding cash, according to the FCA Retirement Outcome Review Final Report, which took the view that “holding funds in cash may be suited to consumers planning to draw down their entire pot over a short period".
The FCA continued: "But it is highly unlikely to be suited for someone planning to draw down their pot over a longer period. We estimate that over half of these consumers are likely to be losing out on income in retirement by holding cash.”
The FCA report draws the conclusion that someone who wants to draw down their pot over a 20-year period could increase their expected annual income by 37 per cent by investing in a mix of assets rather than just cash.
Arguably, this is the clearest signal yet from the FCA that it does not assume investors should necessarily reduce risk at retirement.
That, coupled with the growing body of research on investment outcomes, should give advisers further discussion points with inherently very cautious clients on the risk/reward trade-off.
Risk and the advice process
So how does an adviser deal with the client who is too cautious for their own good?
A simple step might be to ensure your advice process is not primarily focused on investment risk.
If the process begins by you asking about the client’s tolerance to investment risk, this is likely to drive the shape and tone of the conversation, potentially closing down opportunities to explore beneficial alternatives.
Here the primary focus is on the client’s goals – what they want to achieve and when. This determines the investment return they need, which in turn determines how much investment risk they need to take to achieve that.
Only at this point does the adviser consider the client’s investment risk tolerance versus how much risk they need to take to achieve their financial goals.
If the client is not comfortable with the required level of risk then the adviser can take them through the options – for instance, save harder, work longer or reduce aspirations.
Alternatively, they may opt to take up risk just a notch, supported by a combination of these other options.
It might not be natural instinct to many investors, but in the vast majority of circumstances investors would be better off leaving more of their portfolios in equities at and into retirement than they have done traditionally.
That doesn’t mean investors should necessarily take more investment risk than they are comfortable with, but they need to understand that by choosing lower-risk investment options they may be increasing the danger of running out of money in retirement.
And they certainly shouldn’t do it automatically without thinking the issue through. This is something the FCA paper makes loud and clear, and it is very encouraging to see this creeping up the national agenda.
Ultimately, however, investment risk is not the only lever to pull when making investment decisions.
Investors should frame their plans in the context of balancing all the risks they face, not just investment risk.
This includes the risk they can’t save as much as they plan to, that they live longer than expected and that other events happen which knock their plan off course. This is something the FCA paper alludes to.
Advisers have a really important role to play in informing this debate, given this is one of the most important issues for the profession.
It will provide a great opportunity for clients to recognise the real value of planning and, above all, their adviser.
Matthew Yeates is an investment manager at Seven Investment Management
Ask an expert: We look at how HMRC will tax pension income that is over the £1.25m lifetime allowance.
If my pension is worth more than the lifetime allowance and I pay the 55pc tax charge on the excess, is the remaining money over the limit subject to income tax?
The lifetime allowance is the maximum amount that you are able to build up in your pensions before a punitive tax charge is incurred. The limit started at £1.5m in 2006, rose to £1.8m in 2010 and has since been reduced. The LTA is £1.25m for the 2015/16 tax year and is due to drop to £1m from 2016/17.
In essence if you take money above the LTA as a lump sum you pay just the 55pc tax charge and no additional tax. If you take it steadily, as income, you pay a 25pc tax charge and then you also pay your usual rate of income tax.
Jason Witcombe, of Evolve Financial Planning, said you are tested against the lifetime allowance at various points. The most common is when you first draw pension benefits from a scheme.
“Taking a simple example, if you retire with a pension fund of £1.5m and draw it all in one go, you will exceed your lifetime allowance by £250,000,” he said. “This excess suffers a tax charge. In reality, it’s not usually this simple because many people have a combination of defined contribution and defined benefit pensions, which they draw at different stages. Also some people will have protected a higher lifetime allowance.
'Can I use my pension to buy land for a new house?'
'Will my £920,000 military pension take me over the lifetime allowance?'
“But in this example, the surplus can be looked at in two ways. If you take the whole amount as a lump sum, an immediate 55pc tax is charged on the surplus [the £250,000 above £1.25m]. There is no income tax on top of this.
“Alternatively, if you take the surplus as an income, a 25pc tax charge is deducted. You are then liable for income tax on said income when you receive it.
“One way of looking at this is that if we assume that the recipient is a 40pc taxpayer, a 25pc lifetime allowance charge followed by a 40pc income tax charge on the balance works out as 55pc tax. This is because for every £1,000 of excess, a £250 lifetime allowance charge is deducted, leaving £750. After 40pc income tax that leaves £450, resulting in the same figure as the 55pc charge.”
British and EU negotiators have reached a deal over the so-called Brexit bill, opening the door to a potential breakthrough in the talks this December, the Telegraph has learned.
Sources on both sides confirmed that an agreement-in-principle has now been reached over the EU’s demand for a €60bn financial settlement ahead of a crucial lunch meeting next Monday between Theresa May and Jean-Claude Juncker, the European Commission president.
Two sources confirmed that the terms were agreed at a meeting in Brussels late last week after intense back-channel discussions led by Oliver Robbins, the UK’s chief Brexit negotiator.
The Telegraph understands that the final figure, which is deliberately being left open to interpretation, will be between €45bn and €55bn, depending on how each side calculates the output from an agreed methodology.
It means the final amount will be far higher than the opening €20bn offer to win "sufficient progress" made by Mrs May in her Florence speech. The gross UK settlement, before deductions, is understood to be €100bn.
After being dragged down earlier in the day by Bank of England governor Mark Carney’s gloomy warning of potential Brexit “pain”, sterling spiked above €1.12 against the euro as traders piled into the currency on news of a breakthrough in negotiations.
Although it remains true that "nothing is agreed until everything is agreed", sources said that the breakthrough on money effectively now leaves only two major obstacles to overcome in order to make progress when the European Council meets on December 14-15.
These are defining the role of the European Court of Justice in governing the agreement on the rights of 3.2million EU expats in the UK after Brexit, and the continued row between London and Dublin over avoiding a return of a hard border in Northern Ireland.
“The deal on the money is there; it’s now the ECJ question and Northern Ireland that are the outstanding issues ahead of the Council,” said a senior source involved in the negotiations.
The British offer on all three areas - money, citizens’ rights and Northern Ireland - is now expected to be delivered by Mrs May on December 4 in order to enable Michel Barnier, the EU’s chief negotiator, to make his recommendation on “sufficient progress”.
If Mr Barnier gives the green light, a meeting of EU ambassadors scheduled for December 6 will be used to draft guidelines for the December 14-15 European Council summit, with the European Parliament likely to vote on its own “sufficient progress” resolution on December 13.
The precise size of the UK’s payment will not be calculated until the point of UK exit, and the Telegraph understands the EU side is discussing how to obscure the final bill in order to help Mrs May overcome political opposition from Brexiteers.
The UK had already signalled a willingness to pay €40bn, but the Telegraph understands that Mrs May was forced to increase that offer during the course of the last week and has acceded to majority of the EU's demands.
A third EU source with knowledge of the talks said the text of the deal would allow a “low figure” to be generated for the UK public, but that the final text of the deal would give the EU certainty it was looking for, which is in excess of €50bn.
A spokesman for the Department for Exiting the European Union said that “intensive talks” were continuing in Brussels ahead of next week’s meeting.
“We are exploring how we can continue to build on recent momentum in the talks so that together we can move the negotiations on to the next phase and discuss our future partnership,” he said.
Prior to the deal, senior EU negotiators told the Telegraph the UK would need to formally commit to honouring its share of EU pensions, outstanding loan liabilities and €250bn in outstanding spending commitments from the current 7-year budget cycle, due to be disbursed after 2020.
Although the EU has not demanded a final number, the Telegraph understands that it has pinned down the UK over its share of those commitments, leaving only limited room for manoeuvre.
The UK side will seek to massage down its total bill by off-setting the UK's share of European Investment Bank (EIB) capital and discounting payments that are not immediately due, such as Eurocrats’ pensions and potential EU loan defaults to Ukraine, Ireland and others.
EU sources have also argued that Mrs May’s original commitment in Florence to pay €20bn to cover UK contributions during a transition period in 2019 and 2020 would need to be increased. “Net contributions in these two years taken together are clearly above €20 billion,” the source added.
Despite the progress on the bill, the twin problems of the ECJ’s role and the Northern Irish border remain significant obstacles to progress.
A fourth EU source said the deal on EU citizens’ rights was “85 per cent there”, but questions remained over whether the children of EU expats would retain family rights for life; the export of winter fuel allowance and streamlining the UK cost and bureaucracy for EU nationals applying for “settled status”.
On the ECJ question, the discussion is over the extent to which the UK’s Supreme Court should - or must - “pay due regard to” the rulings of Europe’s top court in so far as they impact the rights of EU citizens living in Britain.
Negotiators are still searching for a satisfactory formula that will preserve the ECJ as the final arbiter of EU law, while maintaining the sovereignty of UK courts which David Davis, the Brexit Secretary, has repeatedly promised will be preserved.
By far the most difficult issue, however, remains the Northern Ireland border question with negotiators currently in near-continuous talks to try to draft written commitments on the future of the border that will satisfy the Irish government.
Dublin has demanded “written guarantees” that Northern Ireland will not diverge from EU rules and regulations - a demand that is difficult to reconcile with Mrs May's determination to adopt an independent trade policy.
Negotiators now have less than a week to find a form of words that reassures Dublin of London’s commitment to the Good Friday Agreement, while preserving room to create “granular”, tailor-made solution protects both sides interests.
Brexiteer Lord Bamford has waded back into the political debate, accusing the Government and lobby groups of ignoring the millions of small businesses that form the “backbone” of Britain.
In a rare interview, the boss of manufacturing giant JCB told The Sunday Telegraph that senior politicians could have anticipated the UK’s vote to quit the European Union if they had listened to views of the country’s 5.4m private and family-owned firms. He also launched a fresh attack on the CBI, calling the lobby group a “waste of time”.
“The CBI is a waste of time, it didn’t represent my business or private companies,” he said. “I didn’t agree with its view on Europe.” He claimed the lobby group – and others like it – failed to promote the interests of private and smaller businesses.
“The CBI really only represents 20 companies in my view and they are multinational and not British – something like Unilever, Royal Dutch Shell,” he said.
In his support of Brexit, the peer said he represented the opinions of a huge silent majority. He admitted his stance had made him unpopular with many leading figures in commerce and the Government but addded he was “not the tiniest bit surprised” by the 51.9pc vote to quit the EU.
“Politicians and civil servants glass over when you talk about SMEs and yet they are the backbone of the country,” Lord Bamford said. The CBI hit back, saying it “speaks on behalf of 190,000 businesses of all sizes, which together employ nearly 7m people, a third of the private sector”.
“Any suggestion that the CBI doesn’t represent the diversity of British businesses is patently false,” a spokesman said, adding its president, Paul Dreschler, “chairs one of the UK’s leading family businesses”, the shipping to finances group Bibby Line.
But Lord Bamford’s views were backed by John Longworth, the former director-general of the British Chambers of Commerce, who quit the body in March after saying UK businesses had a “brighter” future outside the EU. “Membership of organisations like the CBI is mostly federations rather than individual businesses,” said Mr Longworth, who is now co-chairman of campaign group Leaves Means Leave.
“They are bureaucracies or big corporations with no particular loyalty to the UK or British people.” The Federation of Small Businesses, which has successfully campaigned on several issues in the past year, including reducing business rates and National Insurance costs for members, said: “Our membership was split down the middle on the Brexit question.”
There are two restrictions on how much you can save into a pension and still receive tax relief on your contributions - the annual and lifetime allowances. If you go over these limits you will face a tax charge.
The annual allowance is currently £40,000 a year - but it could be far less if you are a high earner because of the new "taper".
This has applied since April 2016 and sees the amount you can in a year cut the more you earn.
Jessica List, a technical specialist at Sipp firm Suffolk Life, said this was “one of the most complicated things ever introduced around the annual allowance”.
To work out whether you will be affected you need to calculate a “threshold” and “adjusted” income.
If your threshold income is more than £110,000 and adjusted income is more than £150,000 a year you will be caught and start to see your annual allowance drop from £40,000 to a minimum of £10,000.
Threshold income includes income from all sources, not just your salary. Income produced by investments and buy-to-let properties fall within the scope.
The taper is one of the most complicated things ever introduced around the annual allowance
You also have to add any income given up in a salary sacrifice arrangement, used by many employers to lower National Insurance bills, if it was set up after July 8 2015. From this deduct pension contributions you made to personal pensions, such as Sipps, and to workplace pensions.
If you have received a lump sum from someone else’s unused pension on their death, this is not included.
If the figure produced is less than £110,000 there is nothing to worry about – your annual allowance will be £40,000. If it is above, however, you need to calculate adjusted income.
The Government estimates that 300,000 people who save into pensions will be in this situation.
Adjusted income is calculated in much the same way as threshold income but includes the pension contributions that you and your employer make both from gross pay and via salary sacrifice.
If adjusted income totals more than £150,000 the taper applies and your annual allowance will fall by £1 for every £2 of adjusted income between £150,000 and £210,000. For adjusted incomes of £210,000 or more, the allowance will be £10,000.
However, using what is known as “carry forward”, you will be able to claw back some extra allowance if you have some left over from the previous three tax years. HMRC automatically tops any contributions up by 20pc, but higher and top-rate taxpayers need to claim the extra tax relief through their tax return.
If you have accessed your pension pot using the pension freedom rules introduced in April 2015 your annual allowance is automatically cut to £10,000 and carry forward cannot be used.
However, if you make your withdrawals using a “capped drawdown” plan set up before the freedoms took effect, your limit remains at £40,000.
If you do exceed the limits, HMRC will impose a charge at your marginal rate of income tax.
Reinvesting your pension money is a sneaky way to boost your pot - we explain how it works
Now that savers aged over 55 can access their pension savings in one go, tens of thousands of older people are choosing to take cash from their retirement pot to spend on anything from debt repayments to round-the-world cruises.
For those in the know, a number of attractive loopholes also come into play, which – if used smartly – can be used to increase your income in retirement.
One of the best things about pensions is the attractive tax relief you get when you pay into one. You can carry on benefiting from this even when you’ve retired, although only with strict caveats.
If you’re going to “recycle” your pension money you must do so with extreme caution. If you fall foul of the rules, you could end up with a huge tax bill instead of a small one.
Here we answer common questions on how you can “recycle” your pension money.
How does recycling work?
The theory of recycling is that investors pay into their pension and therefore benefit from the tax relief (paid at the taxpayer’s rate of 20pc or 40pc), and then immediately withdraw the money. It’s a neat turn, all executed at no risk to the saver and entirely at the taxman’s expense.
For every £1,000 paid into the pension of a basic-rate taxpayer, £200 (20pc) comes from the taxman. So your £800 cheque benefits from an instant 25pc (£200) boost.
And if you’re a 40pc taxpayer, there’s even better news: the instant returns you can get just by funnelling some money into your pension are even greater. This is because for every £1,000 paid into the pension of a higher-rate taxpayer, £400 (40pc) is paid by the taxman. So your contribution of £600 is boosted by just over 66pc (£400).
The only slight annoyance is that you must claim back higher-rate tax relief on pension contributions by filling in a self-assessment form, whereas basic-rate tax relief is credited automatically by your pension scheme.
How much can I safely recycle every year?
If you’ve got a “capped drawdown” arrangement that you took out before 6 April this year, and you withdrew at least a penny from it as pension income before that date, you’ll be able to continue investing up to £40,000 a year into it – the normal “annual allowance” for pension contributions.
If you have a capped drawdown pension and you haven’t yet taken any money from it as pension income, you’ll have lost the higher £40,000 limit and you’ll be allowed only the new limit of £10,000 a year. Likewise if you have a “flexi drawdown” arrangement set up after 6 April this year, you’ll be allowed to contribute only £10,000 a year into it in future.
You can contribute only as much as you earn in any given year. Income from your pension unfortunately doesn’t count towards this.
I’m retired and not working. Can I still recycle?
Yes. Say you are over 55, have finished work and are living off savings. You can still invest up to £2,880 per year into a pension, attracting basic-rate tax relief by doing so. This will bring your total pension contribution up to £3,600, giving you a 20pc return on your money.
The money can be withdrawn right away, depending on the terms applied by your pension provider. The first 25pc (£900) is tax-free, and the rest is taxed as income.
Remember that you can earn £10,600 in the current tax year without paying tax, so if you’re a non-earner you’ll be able to take the whole lot without paying any tax. You can repeat this once a year.
I’ve heard I could be taxed at 70pc if I recycle too much. Is this right?
Yes. Since the freedoms were introduced, a number of retirees have decided to use all or part of their pension cash to increase their ongoing pension contributions either directly or indirectly. One common way is to pay off debt and then use the income released (the money you previously used to make regular debt repayments) to pay more into your pension.
This may sound like good financial planning but it’s surprisingly easy to fall foul of the recycling rules. A little-known quirk could result in your original withdrawal being treated as unauthorised, which can incur a tax charge of 70pc.
Two things must happen for your withdrawal to count as unauthorised. First, the tax-free cash you took in a particular tax year has to be more than £7,500. Second, your pension contributions over five years have to be more than 30pc of the value of your tax-free lump sum. The five years that matter are the two years before the withdrawal, the year of the withdrawal itself, and the two years after it.
You don’t even have to make the contributions yourself for them to count; even if they are paid by someone else, such as an employer, they will count against you.
How is the 70pc tax calculated?
If your contributions failed the two tests outlined above, the whole of your tax-free cash would be deemed to be an unauthorised payment.
The withdrawal would trigger an unauthorised payments charge of 40pc and possibly another fine called an “unauthorised payments surcharge” of 15pc. Your pension scheme would then be charged a “sanction charge” of 15pc, bringing the total to 70pc.
The successes and failures of the radical overhaul made to Britain's pension regime in 2015 are coming to light as a committee of MPs calls for evidence in an effort to ascertain whether the "freedoms" are working.
Finance professionals, charities and members of the public have submitted views to the Work and Pensions Committee's "Pension Freedoms Inquiry". The evidence paints a broad picture of how the reforms are being used.
The freedoms were introduced two years ago and allow those over the age of 55 to take their entire pension pot as a lump sum, with the first 25pc tax-free as usual and the rest taxed as if it were income.
Before the reforms, the vast majority of pensioners would purchase an annuity which guaranteed an income for life. The reforms were announced in 2014 and effective from April 2015, since when hundreds of thousands have accessed their pot.
George Osborne, the chancellor at the time, described the move as creating choice and freedom as to how pensioners receive their money, but some voiced concern over how the money would be used. Now written evidence to the committee paints the clearest picture so far of what people are doing with their cash.
There are horror stories...
The most alarming evidence came from Pamela Hewitt, who drew her submission from her experience working as a welfare benefits officer for a social landlord.
One of her clients spent £120,000 of his pension pot on “gambling, a car and alcohol", she said. Ms Hewitt wrote that this individual had held a lucrative engineering job until he was made redundant, his house was repossessed and he fell into a spiral of depression.
His benefits had been stopped due to his savings, including a pension, but once this was investigated it was discovered he had spent all the money. He later released a further £20,000 from his pot against the advice of his accountant.
Ms Hewitt writes that his pot was originally worth £250,000 and the man had drawn on as much as possible, paying very high rates of tax in the process.
She continues that he had been suffering through a period of ill mental health.
“If Mr A had not been able to access his pension pot I can only assume that the years leading up to retirement would have been more stable, as prior to him having access, and following his having spent it all, he has been a stable and ideal tenant,” she wrote.
“I think he chose to spend his money, not to take advantage of the benefit system, but because he didn’t care what happened to him, had addiction issues and knew there would eventually be a safety net.”
A senior local authority official warned that councils could use “deprivation of capital” rules to block benefits payments for people who choose to deplete their entire pension pots intentionally in this manner. This could create huge burdens on charities and Government.
Ms Hewitt recommended that advisers be obliged to inform clients considering taking their cash of the deprivation of capital rules.
...but many people have benefited
One man, who withheld his name, told the inquiry he had boosted his projected retirement income by using his pot to purchase a small property to rent on Airbnb. The 60-year-old had a relatively modest pot of £46,000 which he withdrew a year ago.
He bought a "shepherd's hut" and earned an income of £6,000 last year. He told the inquiry his pot would have purchased an annuity worth £1,600 a year so his projected retirement income has gone from £14,744 to £18,769 - a 30pc increase.
“Pension provider (Aviva) were fine – very professional about checking I had taken advice before drawing down. No pressure from anyone,” he wrote.
“No one contacted me to sell me any risky investments. This is the only decent thing George Osborne ever did.”
Another person, who also withheld their name, took a portion of his pension pot early in order to get round the “lifetime allowance” for his pension. He said once investment growth was taken into account his pot was likely to breach the allowance within five years.
Taking the money warded off this possibility, as the value is calculated at certain “crystallisation” events. He used the money to buy a boat.
The pension freedoms tax glitch
One downside which also comes out in submissions to the committee is a tax glitch which has left tens of thousands waiting for their money.
Because HM Revenue & Customs calculates income tax liability on a monthly basis, those taking a large lump sum have been taxed at the higher rate, even if they will have no other income for the rest of the year. This has meant they have been forced to wait for months to get their money back.
Telegraph Money has campaigned for this issue to be fixed. The man who bought the shepherd’s hut said he had been forced to pay higher tax and said his experience with HMRC had been "the only negative throughout the entire process".
Once seen as a last resort, the use of specialist, later-life mortgages is increasingly common among well-off homeowners keen to fund “living inheritances” and avoid death duties.
The proportion of £500,000-plus properties being used for “equity release” – as this borrowing is generally termed – has risen at some specialist firms by as much as three times since 2012.
In part this surge has been driven by the booming housing market, particularly in London and south-east England.
However, the growth in the value of the average property used to withdraw cash using equity release or “lifetime mortgages” has far outstripped national house price rises – suggesting that equity release is going “upmarket” as wealthier people embrace it as a broader financial planning tool.
House prices across the country rose by an average of 12.6pc between 2014 and 2017, according to figures from Nationwide Building Society, compared with a 26pc rise in the value of the average house used for equity release (see graph below).
“The increase in the numbers of wealthier, older homeowners extracting cash from their homes through equity release is testament to the fact that those with considerable property wealth are looking to utilise it,” said Dean Mirfin of Key Retirement Solutions, a specialist adviser.
The pension freedoms, a series of reforms introduced in April 2015, have created another incentive to use the plans, said Nigel Waterson, chairman of the Equity Release Council, the sector’s trade body.
As a result of the reforms, people aged 55 or more are able to take their entire pension pot as a cash lump. At the same time, the pensions “death tax” on unspent savings was removed.
Now, instead of pensions being subject to a 55pc tax at death, there is no tax to pay if the individual dies under 75. And only income tax, at the recipient’s marginal rate, is due if death occurs after 75.
This has opened up an entirely new field of inheritance tax planning where the well-off are effectively incentivised to leave their pensions intact and spend other money in retirement – including, potentially, money raised by borrowing against their home.
Financial advisers routinely now tell their clients to spend their other assets such as Isas, which do attract inheritance tax, first, before emptying their pension pots, Mr Waterson said.
“If you’re reasonably well off with a valuable house and decent-sized pension pot it makes huge sense to leave your pension intact to pass on tax-free to your children,” he said.
“Then you can use equity release to give them a ‘living inheritance’, to buy their first property for instance, and to save on inheritance tax.”
The sums removed from properties via equity release schemes have rocketed over the past 12 months. More than £700m was released from homes between April and June this year, the most ever in a single quarter. It is expected that 2017 will see more than £3bn in new borrowing, the highest figure on record.
Equity release plans come in a variety of forms but all involve taking cash – as a lump sum, as income or both – from a home. Typically the loan, which grows with interest that “rolls up”, is paid off only on death. Minimum ages vary between providers but is typically 55. It is mandatory to take regulated financial advice when using equity release.
In the past, taking a mortgage out on homes later in life was seen as a last resort where all other income options had been exhausted. The sector was mired in controversy in the Nineties when thousands found that high interest rates had swallowed all the equity in their properties.
Since then the City watchdog has taken oversight of providers, the vast majority of which now offer “no negative equity” guarantees that mean loans will never be more than the property value.
Interest rates are still far higher than on conventional mortgages but have fallen steadily following the Bank of England’s cut to the official interest rate in August last year. In 2012 the typical loan rate for a 70-year-old was around 6pc, according to Key Retirement, and is now just 4pc. At the latter rates, debts will double in 20 years – at 6pc it would take 10. These figures are based on compounding the interest.
Lenders have also added features that allow borrowers to protect their family’s inheritance by “ring-fencing” equity or paying the interest during their lifetime, which prevents the loan from escalating.
Paying for home renovation is still the most common use of funds released from lifetime mortgages, according to the Equity Release Council, but lenders say it is becoming more popular to use the cash released to help children on to the property ladder.
A spokesman for Aviva, one of Britain’s biggest lenders, said: “We are seeing larger sums of money being accessed in individual cases, which is likely to be a reflection of the increasing number of uses people have for released equity, such as helping both themselves and family and for efficient inheritance tax planning.”
Another popular use of equity release is to clear outstanding mortgage debt as people enter retirement. For many, downsizing may still be the best option.
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