Retirees not recklessly spending pension wealth!

Ever since the Pension Freedoms were announced in 2015, there have been concerns that many people would simply cash in their retirement savings and squander the money. A recent study however, suggests that this is far from the truth.

Older people are holding onto their savings and are reluctant to spend money impulsively, according to research from the Institute for Fiscal Studies (IFS).

A survey published on 11th June 2018, looking at how individuals use their wealth once they retire finds many are not drawing down as much wealth as they could.

It says, on average, individuals will draw down just 31 per cent of net financial wealth between the age of 70 and 90.

Even among individuals in the top half of financial wealth distribution, net financial wealth appears to be drawn down by just 39 per cent, on average.

The IFS suggest this wealth, whether held in housing or in financial assets, is likely to be passed on to later generations.

However, inheritances will typically only be received at relatively older ages and so someone currently aged 40 might expect to receive a bequest from their parents at age 63.

IFS associate director Rowena Crawford says the way wealth is inherited will have implications for the level and distribution of resources among current working age individuals, particularly those with wealthy parents and few siblings.

Therefore, the increased freedom people now have over how they spend their pension wealth in retirement will require careful monitoring, she adds.

Royal London policy director Steve Webb says: “This report confirms that the vast majority of pensioners who have saved through their working life are cautious with their money and leave unspent wealth at the end of their lives.

“This is great news for those who believe in pension freedoms. The IFS research suggests that the biggest concern about pension freedoms is likely to be about excessively cautious retirees spending too slowly than it is about reckless retirees blowing their pension savings on lavish living.”

The key takeaways for me from the above are as follows:

1. ‘Individuals will draw down just 31 per cent of net financial wealth between the age of 70 and 90.’
2. ‘Someone currently aged 40 might expect to receive a bequest from their parents at age 63.’

Regular visitors to my office will know I stress these points at virtually every client meeting. The whole point of proper financial planning is to ensure that you are able to enjoy the best lifestyle possible, within your means and if your primary objective is to help your children, to enable you to do this before you die and the children are really too old to benefit! A robust Lifelong Cashflow Model should be able to give you the confidence to make these hugely important decisions.

As always, if you have any concerns about your financial arrangements and whether you are truly making the most of your money, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

As the late Jim Bowen might have said, “Look at what you could’ve won!”

Financial management is not normally a particularly humorous subject but I hope you will enjoy the video below, produced by a fictional US firm called ‘Hindsight Financial’!

Click here

I do hope our advice proves rather more helpful!

As always, if you have any concerns about your financial arrangements and whether you are truly making the most of your money, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Taking income under ‘Flexi-Access Rules’ from a Personal Pension – for the first time!

As you are probably aware, since April 2015, it has been possible to take as much as you like from your pension (assuming it is a defined contribution plan and the provider has amended their rules) and, at any time once you are age 55 (in most cases).

However, determining how much tax will be deducted by the pension provider can be quite a challenge. A number of our clients have been unaware of how the tax rules are applied; I hope the following guidance will provide some clarity around this issue.

Income can be withdrawn from appropriately flexible schemes either under Flexible Drawdown or by taking an Uncrystallised Fund Pension Lump Sum (UFPLS). In both cases tax will be due on any income (although not the pension commencement lump sum component, which is paid tax-free) at the recipient’s marginal rate of income tax. The amount of tax deducted by the provider is processed under the Pay as You Earn (PAYE) scheme but the amounts deducted can sometimes provide an unwelcome surprise.

What happens when income is first taken?

If the pension scheme does not hold an up-to-date tax code and the individual does not have a P45 for the current tax year, the scheme administrator must tax any payment under the emergency tax rules. Where this is the case, it is assumed that the amount being withdrawn will continue to be paid each month, even if it is a one-off payment. This is known as the ‘Month 1’ basis and the administrator will apply 1/12th of the personal allowance to the payment and 1/12th of each of the income tax bands to the extent that they apply.

UFPLS Example:

£20,000 withdrawn, of which £5,000 (25%) is Tax-Free Lump Sum and £15,000 is income.

£ 987.50 (£11,850 / 12) taxed at 0% =             £0

£ 2,875.00 (£34,500 / 12) taxed at 20% =        £575

£ 9,625.00 (£115,500/12) taxed at 40% =        £3,850

£1,512.50 taxed at 45% =                                 £680

Total Tax Paid =                                                 £5,105

So, the £15,000 income has an effective tax rate of 34.03%.

Shortly after making the payment, the pension provider would normally receive an updated tax code from HMRC to use against any other income payments in the tax year and can usually help to address any overpaid tax.

However, this will not immediately recover any overpaid tax for clients who do not intend to take any more income during the tax year. Ordinarily, they would need to wait until the end of the tax year to claim back the over-paid tax.

On the other hand, it is also possible that income is paid from other sources that also use up the Personal Allowance or other income tax thresholds. In this scenario, using the emergency code will mean that more tax is due on the payment and this could increase the amount of tax deducted on future payments.

If there are no further income payments, any refund due can be claimed at the end of the tax-year, although this may require the completion of the self-assessment tax return. Alternatively, it is possible to submit an “in-year” claim from HMRC using the relevant claim form:-

• P50Z – For withdrawals that exhaust a pension fund and the client has no other sources of income.
• P53Z – For withdrawals that exhaust a pension fund and the client receives income from other sources.
• P55 – For use with a partial withdrawal of a pension fund and where there will be no further withdrawals in the current tax year.

One way to avoid such nasty tax surprises is to request the scheme administrator to make a nominal payment (up to £988 gross) prior to the main withdrawal. The small payment will be taxed on the emergency basis but will not attract any tax if below £988. The pension administrator’s provision of Real Time Information (RTI) PAYE data to HMRC usually triggers a revised tax code to be issued shortly after this payment and this code can be applied to future payments. This will avoid the need to apply the emergency code to the main withdrawal (although, please note, that the revised code could also be issued on a Month 1 basis).

The main point of note here is that, if a large withdrawal is required and it is intended to use the mechanism above to avoid a tax headache, more notice of intentions will be required.

Lump Sum vs Annual Payment

Where a one-off lump sum is taken, and the provider is not operating a Month 1 tax code, the Personal Allowance available to that point in the tax year can be applied to the extent it has not been used by earlier payments. If, however, the intention is to only take one payment during the tax-year, it can be requested as an annual payment. In this scenario, the whole personal allowance for the year can be applied, thus saving the need for any later reclaims.

I appreciate the above is a little complicated but if you are planning on making a withdrawal, please contact either myself or Adam and we will be happy to provide some guidance. Please do not be alarmed by any of this, it usually is a fairly straightforward process and with enough notice, it can be managed quite easily.

As always, if you have any concerns about your financial arrangements and whether you are truly making the most of your money, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

General Data Protection Regulation (GDPR)

As I am sure you have heard, Data Protection laws are changing on 25 May 2018.  The EU’s General Data Protection Regulation (GDPR) is being introduced to unify all EU member states' approach to data regulation, ensuring all data protection laws are applied identically in every country within the EU. It will protect EU citizens from organisations using their data irresponsibly and puts them in charge of what, where and how their data is shared. 

Despite ‘Brexit’ all UK companies must comply with GDPR, as we remain in the EU at the time the new rules come into force.

Clearwater Wealth Management never share your data with third parties, without your express permission to do so, but we want to take this opportunity to provide you with a chance to review your communication preferences with us.

I am sending you this email because you are on our distribution list for my regular ‘Round Robin’ communications.  If you find these helpful, and would like to continue receiving them after 25 May 2018, please indicate this using the options below.  Clicking on the appropriate link below will generate a pre-populated email for you to send back to us.

By clicking here, you give us at Clearwater Wealth Management consent to continue contacting you by email with information we feel might be of interest to you.

By clicking here, you are ‘opting-out’ and will be removed from our contact list. 

If you do not reply we will assume you would like to opt out and will ensure we update our records.

You can, of course, change your decision at any time in the future by emailing us or giving us a call.  You will also notice the introduction of an ‘unsubscribe’ option on my Round Robin emails from now on so please feel free to make use of this.

As always, if you have any concerns about your own financial arrangements and whether you are truly making the most of your money, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Some words of wisdom for the nervous investor!

I am a great fan of a man called Nick Murray, a Financial Adviser in the US, and what follows are a few of his beliefs around investing. I subscribe to these views 100%!

I thought you might find these pearls of wisdom reassuring while markets seem to be going through a turbulent period.   

I believe that the great long-term risk of stocks is not owning them

On July 8, 1932, the intra-day low of the Dow Jones Industrial Average was 40. On October 14, 1996, the Dow closed over 6000. The intervening period was the worst in human history: Depression, WWII, Cold War etc. However anecdotally, I infer from these data three things. The right time to buy stocks is now (as long as you have the money); the right time to sell them is never (unless you need the money); the great risk is not owning them. Incidentally the Dow Jones, even after recent setbacks, sits at around 25,000.

I believe that everything you need to know about the movement of stock prices can be summed up in eight words: the downs are temporary; the ups are permanent.

I never mistake fluctuation for loss. Share prices go down all the time – 25% or so on an average of every five years (albeit not lately) – but since they never stay down, it turns out not to matter. Markets fluctuate but do not create losses. Only people can create permanent loss by mistaking a temporary decline for a permanent decline, and panicking out. No panic, no sell. No sell, no lose. The enemy of investment success is not ignorance, it’s fear. So, it’s my faith, not my knowledge that saves the investor’s financial life.

I process the experience which most people describe as a ‘Bear Market’ in two different words; BIG SALE!

Since all declines are temporary, I regard all major generalised equity price declines as an opportunity to stock up on some more truly safe investments before the sale ends.

I don’t believe in individual stocks, I believe in managed portfolios of stocks

I can break a pencil; I cannot break 50 pencils tied together. That’s diversification. Thus, one stock can go to zero but stocks as an asset class can’t go to zero.

I believe that dollar-cost averaging (making regular investments over a long-period of time) will make the dumbest person in the world wealthy. Hey, look at me; it already has! 

The more ‘knowledge’ you have the more you try to outsmart the market, and the worse you do. The more you see the market as long-term inevitable/short-term unknowable, the more you’re inclined to just dollar-cost average and the better you do. Dollar-cost averaging rewards ignorance with wealth.

I love volatility

Volatility can’t hurt me because I am immune to panic. And, it can help me in a couple of ways. First, in an efficient market, higher volatility means (and is the price of) higher returns. Second, higher volatility when I’m dollar-cost averaging means even higher returns. Higher returns are good. Trust me on this.

I’m not afraid of being in the next 25% downtick. I’m afraid of missing the next 100% uptick!

And I’ve noticed that I have no ability whatever to time the markets. Still, I have found a way to machine the risk of missing the next 100% uptick down to zero. It’s called staying fully invested all the bloody time. Works for me.

I believe that prior to retirement, people should own as close to 100% equities as they can emotionally stand. Then, after retirement, I believe they should own as close to 100% equities as they can emotionally stand.

If it follows that stocks will always rise (eventually), then the above has to be true. Whether your emotions can stand it is perhaps a different matter. Many would happily sacrifice some of those higher returns for a good night’s sleep.

If you have any concerns about market gyrations over the coming weeks and months, just come back to this and every time you get an attack of the jitters (we all do, even me); keep rereading it

As always, if you have any concerns about your own financial arrangements and whether you are truly making the most of your money, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

It’s that time of the year again!

As we approach the end of the 2017/18 tax-year, thoughts inevitably turn to end of year tax planning and any unused allowances (ISA, Pensions etc.) that may be available.

The ISA allowance for 2017/18 is £20,000 and if you have not made a subscription (or perhaps you have only made a part subscription), there is still time to use this allowance, if you have the funds available.

Since 6th April 2016, in addition to the subscription, it has been possible to top-up ISAs by any amounts withdrawn during the tax-year, including any charges deducted. This means that even if you have not made a subscription this year but have ISAs from previous years, your personal ISA Allowance may be more than £20,000 because of charges deducted during the year. If you made a subscription at the beginning of the tax-year, you may still have a residual allowance left because of these deductions which can be utilised by 5th April 2018.

If you have a Standard Life Wrap Account, the scope for top-up (in addition to any unused subscription) does not apply, unless you take physical withdrawals from your ISA. This is because Standard Life deduct ISA charges from the cash held in your Portfolio and not from the ISA itself.

If you have a Transact Wrap Account and you would like to know your personal ISA allowance for the remainder of the 2017/18 tax year, you can access this information on the Transact website. From your home page, select reports and from the drop-down menu, select ISA Subscriptions.

If you would like to use the balance of your allowance before 5th April, please ensure you advise us of your intentions before the end of March; we will be very pleased to assist. If your ISA is with Transact, please give us as much notice as possible, as a form may be required, if you have not made a subscription since Tax year 2016/17.

Just for information, the ISA Allowance for 2018/19 will remain £20,000 each, so £40,000 per couple.      

If you have any concerns or questions about the above or indeed any other finance related matter, please do not hesitate to call me at any time.

With best wishes,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Staying the Course!

With markets once again fluctuating wildly, I thought another reminder of the wisdom of not responding to short-term headlines and market gyrations might be useful.

Investors tend to see short-term volatility as the enemy and this can tempt many people to try and move money out of the market and “sit on the sidelines” until things “calm down.” Although this approach may appear to solve one problem, it creates several others:

1. When do you get back in? You must make two correct decisions back-to-back; when to get out and when to get back in.
2. By going to the sidelines you may be missing a potential rebound. This is not historically unprecedented; see chart below.
3. By going to the sidelines you could be not only missing a potential rebound, but all the potential growth on that money going forward.

I believe the wiser course of action is to review your investment objectives and decide if any action is indeed necessary. This placates the natural desire to “do something”, but helps keep emotions in check. Short-term needs should nearly always be met from cash and longer-term needs can be planned for in advance; funds can be withdrawn when conditions are more favourable.

The following charts show the Intra-Year Declines (the furthest the market dropped during each discrete year) vs Calendar Year Returns (the return an investor would have received by staying invested for the whole of that year), for the FTSE 100 Index and the S&P 500 Index since 1984.

The charts clearly show that, in most cases, investors who did not react to short-term volatility were rewarded for their patience and courage. 

As always, if you have any concerns about your own investments, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Good News, Bad News!!!

The Dow Jones Index (the mostly often quoted US share index, even though it only represents 30 companies) suffered its sharpest points fall in history yesterday and this rout was immediately replicated in Asian markets overnight and in Europe this morning. The FTSE 100 opened down 3.5% but has since recovered some ground, it’s down 1.87% as I type.

America sneezes and the rest of the world does indeed catch a cold.

It is important to put these recent falls (markets have been trading down for a week or so now) into proper perspective. The falls actually follow some very good years for investors. In 2017 the Dow was up 25%, helped by a resurgent economy and strong corporate profits and European markets have also seen solid growth without a great deal of volatility; so maybe some form of correction is overdue.

What is interesting is the cause or rather the trigger for this correction. The global sell-off began last week after a particularly solid US jobs report (good news, right?) fuelled expectations that inflation will rise, leading the Federal Reserve to raise interest rates faster than expected. This makes corporate borrowing more expensive, which is of course, not good for companies (oh, so it’s bad news!).

The following is taken from the BBC website:

‘Jane Sydenham, investment director at the stockbrokers Rathbones, told the BBC the falls did not appear to herald a serious change of sentiment: "It is always a bit too early to tell, but I think these recent market falls are in the nature of a correction.

"What we have to remember is stock markets have had a very smooth ride upwards and we've not had a fall of more than 3% for 15 months. There's been a real lack of volatility, which is very unusual."

She added that bear markets tend to happen ahead of a recession and at the moment growth forecasts were being upgraded.

Re-evaluation

Erin Gibbs, portfolio manager for S&P Global Market Intelligence, said: "This isn't a collapse of the economy.

"This is concern that the economy is actually doing much better than expected and so we need to re-evaluate."

One country whose immediate economic outlook remains stagnant is Japan. The authorities there said there was little chance of interest rates being increased.

The Bank of Japan's governor, Haruhiko Kuroda, ruled out the possibility of raising interest rates in the near future. He said it was "inappropriate" to do so with inflation still about half its 2% target.

But markets in Asia typically follow the lead from the US.’

That last point is very interesting; there is no prospect of Japan increasing interest rates as is feared in the US and yet Asian stock markets still tumble. Sometimes markets appear to need an excuse just to reassess valuations.

These falls might present an excellent buying opportunity for long-term investors but there could be some more downside before sentiment improves.

If you have any concerns about your own investments, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Festive Greetings!!!

Adam, Denise and I would like to take this opportunity to thank you for your continued support and of course to wish you and your family a very Merry Christmas and a Happy New Year!

As with a number of previous years, in lieu of sending individual Christmas cards, we have once again decided to make a donation to a worthy cause, in fact on this occasion, two worthy causes!

Sadly, over the course of the last few days I have attended the funerals of two of my lovely, long-standing clients. Their families have asked for donations to charities in their memory; the charities in question are Rennie Grove Hospice Care and The Camphill Village Trust.

Rennie Grove Hospice Care is a charity providing care and support for adults and children diagnosed with cancer and other life-limiting illness and their families. Every year through their 24/7 Hospice at Home service, their Family Support services and the range of Day Services at Grove House they give thousands of patients the choice to stay at home, surrounded by their families and friends.

The Camphill Village Trust helps to offer a supportive home and fulfilling life to over 350 vulnerable adults in nine communities. Whether they are able to live in a household with others, or more independently, they are encouraged to accept and appreciate each other for who they are and are encouraged to always give of their best.

I hope you will approve of my decision to support these very worthwhile charities.

I do hope 2018 brings you all you would wish for.

With very best Christmas wishes,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

How rich are you?

Some of the following has been taken from an article by Simon Lambert in This is Money magazine on 12th Jan 2017, although I have edited it quite considerably.

How rich are you? The highly subjective answer to this question will be influenced by your attitude to wealth, income vs spending habits, and where in the country you live. 

For the purposes of this exercise we are ignoring income in the definition of how rich one might be and are concentrating solely on the value of one’s assets.

To find out where one features on the wealth scale, we need to refer to a set of figures produced by the Office for National Statistics (ONS), although these are only produced infrequently. 

The ONS’s Wealth and Assets survey breaks down what the country owns by percentiles, to give households' net wealth. It includes in there:

• Net Property Wealth – any property owned minus the mortgage 
• Net Financial Wealth – everything you have in the bank, savings and investments, minus any debts 
• Pension Wealth – the value of a defined contribution pension pot or the future value of a defined benefit income 

Pension wealth is not to be underestimated, particularly where defined benefit/final salary pensions are concerned. As an example, an expected final salary pension of say £35,000 per annum could reasonably be capitalised to a value well in excess of £1 million. i.e. this is what it would cost to buy an index linked pension with spouse’s benefits of £35,000 on the open market. The rule of thumb I use, is to multiply the anticipated income by 30; recent examples have shown this to be conservative.

The most recent figures that run to 2014 show that the bottom half of UK households have just 9 per cent of the wealth, whereas the top 10 per cent own 45 per cent of it. 

The median (the middle point of the total distribution) household wealth was £225,100, while the bottom 10 per cent of households had total wealth of £12,600 or less and the top 10 per cent had £1,048,500 or more.  

To make it into the 1 per cent, you need £2,872,600 of household wealth – but remember, this comprises everything, including pension wealth.

The bottom 1 per cent has negative wealth - at minus £4,434 (although to me this percentage in negative wealth seems low and I would expect debts to push more people into that category).

Surprisingly, the ONS figures show that overall it is actually pension wealth that accounts for the largest chunk of the overall figure, at 40 per cent, followed by property wealth, at 35 per cent. 

However, while their median pension wealth value of £749,000 contributed 43 per cent of total wealth to the top decile of households, where 98 per cent had some, it contributed just 29 per cent to the total of the least wealthy half of households. 

Property wealth was more important for this lower half, where it contributed 34 per cent of the total, even though just four in ten owned homes. Property with a median value of £420,000 contributed 31 per cent to the total wealth of the top 10 per cent.

Whilst Simon’s figures are interesting, there are of course other, much more important measurements of one’s wealth! I am, of course, referring to the non-tangibles that enrich our lives, our families, our friends, our shared experiences and our memories; it’s impossible to put a value on these and yet I hope we would all agree, they transcend physical wealth every time!

I hope you find the above interesting but, as always, if you have any concerns or questions about any finance related matter, please do not hesitate to call me at any time.

With best wishes,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner