But have you ever thought about where these came from, or how each savings initiative has changed over the years? In the following infographic, personal pension specialist True Potential Investor has taken a step through time with this question in mind.
Did you know that the first known building society formed for groups of individuals who were looking to help each other to buy property? Or that the Bank of England was founded towards the end of the 17th century to fund the war effort against France? How about that the Amsterdam Stock Exchange was believed to be the world’s first stock market?
Discover even more fascinating facts by browsing through the full infographic below…
This is the surprising finding of a new global survey carried out by deVere Group.
Those in Generation Y (24-38 years old) who started seeking financial advice from deVere in 2018 on average saved 19 per cent of their income for their retirement.
Those in Generation X (39-53-year olds) put aside 16 per cent on average of their income for retirement; and the Baby Boomers (54-74 years old) 35 per cent.
More than 660 people participated in the survey in the UK, Europe, Africa, Asia and the U.S. amongst new clients taken on by deVere throughout last year.
Of the survey, Nigel Green, founder and CEO of deVere Group, comments: “The results of the saving survey are both encouraging and alarming.
“It is encouraging that millennials – often falsely stereotyped for their sense of entitlement and for being content to pay for overpriced coffees and smashed avocado on toast - seem to be better at saving and more fiscally responsible than many would have thought.
“Despite their reputation for purely living for today, the poll shows that they are saving for their retirement pretty impressively. Putting aside nearly a fifth of their income already is highly commendable, especially when many can be expected not to be yet at the peak of their earning power.”
He continues: “What is alarming, however, is that Gen X, and to an extent Gen Z, workers are not saving nearly enough in order to be able to have a comparable lifestyle in retirement. And by the virtue of being older, they have less time to build wealth before leaving work.
"It’s perhaps particularly concerning because we’re living longer, meaning the money we accumulate has to last longer; in the future, it’s unlikely that governments will be in a position to support older people like they have done for previous generations; there is a looming health and social care crisis; as well growing deficits in company pension schemes.
“In addition, it has to be considered that there might not be the option available to work longer if necessary due to ill health, lack of career opportunities, or because of the need to look after sick or elderly relatives.”
Mr Green goes on to say: “We need to revitalise the savings culture of Gen X especially. Otherwise many of today’s working population are going to reach retirement and find they have to downgrade their lifestyle and/or continue working longer than they had expected and hoped, due to a lack of savings.”
The deVere CEO concludes: “It’s never too late to start saving for your future, but of course the earlier you begin, the easier it will be to reach your long-term objectives. As such, the millennials surveyed deserve huge credit.
“There’s a plethora of financial planning solutions that help you achieve financial freedom in retirement at whatever age you are.”
(Source: deVere Group)
New research from MoneySuperMarket reveals that, amongst younger age groups, saving for a house is a far higher priority than saving for retirement.
Homes are by far the most important savings point for millennials, with 23% of 18 – 34 year olds saying that they are saving for a house above anything else. Those saving for houses are more prevalent among the younger side of the age group – as the figure saving money towards their home rises to 39% among 18-24 year olds.
Only 4%, however, say their primary savings concern is retirement, and 33% of millennials don’t have a pension pot in place. Even those who do aren’t keeping an eye on it, as a further 53% don’t know how much is in their pot.
Many people in the UK haven’t even started thinking about saving for when they stop working. Most have no idea how much they need to save to live a comfortable life in the future, underestimating the cost of retirement by £169,000 on average. However, whilst home ownership can seem like a pipe dream for many young people in the UK, the fact that a house was by far the most prioritised aspect to save for amongst the younger age groups shows that many are still hopeful they can get their foot on the housing ladder.
Using consumer research, MoneySuperMarket has built an interactive tool that people can use to see how prepared they are compared to their peers, with results tailored by the user’s age and gender.
(Source: MoneySuperMarket)
Below Finance Monthly hears from Jeannie Boyle, Director & Chartered Financial Planner at EQ Investors, who provides 5 top financial planning tips to help you on the right path to a financially sound 2019.
1. Set goals for the life you actually want
Work out what you want from life and make your money work towards that, rather than vice versa. Your priorities will naturally change over time, so taking the time to differentiate your short, medium and long term goals will help keep you focused and on track through the inevitable bumps in the road.
2. Make the most of your tax-free allowances
With tax allowances, it’s a case of use them or lose them. Ensure you and your partner are using all available allowances; personal, savings and dividends. If you haven’t taken advantage of this year’s Isa, junior Isa, lifetime Isa or annual pension allowance, the 5 April is your last opportunity to do so in the 2018-19 tax year.
3. Get pension savvy
An increasing number of individuals will be affected by taper annual allowance as carry forward is used. For those with taxable incomes of over £100,000 per ann
m, it’s worth having a review to check employer and employee contributions remain appropriate. From April, the pensions ‘automatic enrolment’ regime will see the minimum amount paid in rise from 5% to 8%.
The Lifetime Allowance increases with CPI inflation from £1,030,000 to £1,055,000. Also make sure that your expressions of wish for pensions are regularly updated.
4. Build a picture of your current and future finances
Financial planning is all about anticipating the consequences of different choices and situations. By looking at your income, outgoings, savings and other assets, you can crunch the numbers to create a long-term projection of your finances. Identifying trends (positive or negative) can help to give you the best chance of achieving your goals and have a huge impact on how in control of your finances you are.
We’ve designed our free online health check to help you measure your financial fitness, and to see what your finances might look like in the future.
5. Peace of mind
One person in the UK develops dementia every three minutes, so stay in control and plan ahead by setting up a Lasting Power of Attorney (LPA) and allow powers for discretionary management. Every adult with assets should look at getting an LPA, otherwise your loved ones will need to apply through court. And don’t keep putting off getting or updating a will.
Do you know the difference between pensions and retirement planning? Not many people do or how important it is to start financially planning early on in life. Here Andy Baker explains the basics of retirement planning and the best strategies for young savers.
More information:
Investments for millennials
https://www.eqllp.co.uk/interactive_resources/video-resource-items/investments-for-millenials/
Investments for millenials - Ben Rogers - Equilibrium
Pensions for millennials
https://www.eqllp.co.uk/interactive_resources/video-resource-items/pensions-millennials/
Pension planning for millennials - Paul Farrugia - Equilibrium
Preparing for your children’s future
Preparing for your children's future - Jason Lowe - Equilibrium
Nine out of ten workers are ‘financially sleepwalking’ into retirement, reveals new research.
Carried out by deVere Group, the research finds that 89% of all new, working age clients did not realise how much money they would need in order to fulfil their own retirement ambitions before they began working with an independent financial adviser.
More than 750 new and potential clients in the UK, the US, Australia, South Africa, Hong Kong, Spain, Qatar, France, Germany, and the United Arab Emirates participated.
Of the findings, Nigel Green, founder and CEO of deVere Group comments: “It is very alarming indeed that nine out of ten workers are financially sleepwalking into their retirement.
“The poll concludes that the overwhelming majority simply do not know just how much they will need to save during their working lives to fund the retirement they desire. Not knowing how much they will need for something as important as funding their retirement is worrying.”
He continues: “It’s particularly concerning in this day and age because we’re all living longer meaning the money we save has to last longer. Also, because governments are unlikely to offer the same level of support as they have done for generations before due to an ageing population and shrinking workforces; because living, health and care costs will increase significantly; and because company pensions are less generous, if they exist at all.”
How much people need to be putting aside now, and in the years to come, in order to be able to enjoy the retirement they want for themselves and their families does vary from person to person, of course.
However, as Nigel Green observes, there is a consistent theme: “Before they have an initial meeting with an adviser, the vast majority of people underestimate how much they need to be putting aside for their retirement. This is the case across all incomes, working age brackets and nationalities.”
He adds: “People are typically shocked when it is revealed how much they should be saving now to realise their own retirement ambitions later on. They have usually considerably underestimated the money they will need.”
The deVere CEO concludes: “Despite the shocking poll, there are always methods to plan and maximise retirement savings at every stage of your working life.
“But it cannot be stressed enough that the earlier you start your retirement planning strategy, the easier the journey to hitting your goals will typically be. I would urge people to take their heads out of the sand and get informed.
“By putting in place a clear, workable plan, you’re laying the foundations to have a comfortable and financially secure retirement.”
(Source: deVere Group)
To hear about defined benefit transfers and pensions in the UK, Finance Monthly connected with Chartered Financial Planner and Chartered Wealth Manager Pierre Coussey. With over 30 years of experience in financial services both within the largest providers in the UK and at the coal face within private practice, Pierre is also the current Chairman of the Personal Finance Society (Kent region) and is a past Examination panel member of the Chartered Institute of Securities and Investment (CISI).
What are the typical challenges that clients approach you and Bond Wealth with in relation to transferring their defined benefit pension?
Pension freedoms, which came into effect in the UK back in 2015, introduced the ability for those with defined contribution pension arrangements to access their pensions without the need to buy annuities and also pass their pension funds onto family. The biggest headline was probably giving them a choice to buy a Lamborghini if they choose to do so. This did not cater for the 5.1 million people in the UK who held old benefits in an ex-employer or closed defined benefit scheme (pensions that promised an income for life). One of the things we have seen is a massive demand for pension transfer advice and this is partly being driven by some of these factors, together with historically very high transfer values in terms of multiples of deferred pension promise (with 30 to 40 times being quite common).
The complexities of what is best for a client are amongst the most challenging and are often not fully understood by potential clients. Our general view is that for the majority of people, sticking with the defined benefits will be correct unless they can fully take into account wider factors and understand them. Thus, a starting question would be “why would they want to give up a guaranteed pension for life?”.
What would you change about defined pension schemes, if you could?
As a pension pot needs to meet a number of needs, it is frustrating that in the main partial transfers from the existing defined benefit schemes are not facilitated. If I could have a panacea, this would be available to all, so that a mixed approach could be customised specific to a client’s actual needs rather that the current all-or-nothing transfer choice. Unfortunately, I do not see this changing as existing schemes have no appetite to spend on this flexibility for past members and are inundated with transfer value requests.
What is your overall piece of advice for Finance Monthly’s readers in regards to defined benefit schemes?
My overall piece of advice regarding defined benefit schemes is to start with the assumption that your existing pension arrangement will be best in providing for you and your family and then write down your three main reasons for considering or wishing to transfer and the three main drivers in your retirement planning. The bigger the lifestyle cost this needs to support, the bigger the value and risk transference you are putting into your own lifestyle bucket.
Additionally, talk to an experienced regulated adviser who can initially help you explore your real lifestyle needs. This should be followed by further working with them to explore your actual retirement needs that will fit with your lifestyle in the future. Ultimately, if they can save you from potential mistakes at either of these stages, the cost of good advice will be small compared to what would be at risk of getting it wrong. If you transfer out of a defined benefit scheme, you cannot reverse that decision and transfer back.
Ultimately, your chosen regulated adviser can take you through these initial steps at a relatively low cost. It is essential to bear in mind the merits or drawbacks that may appear with the transfer, but might not become clear until several years down the line. One example of this is that a client is probably not going to run out of money in the first year. The risk of this however could increase in the following 10-15 years, if they, for example, decide to spend all of their money on the aforementioned Lamborghini.
Contact details:
Telephone: 01892506891; 0203 096 3385
Email: pc@bondwealth.co.uk
Jayne Gibson is a professional financial planner, a pension transfer specialist and the Managing Director of Insight.Out Financial. Below, Jayne speaks to Finance Monthly about defined benefit schemes and the challenges they can come with them, as well as the one thing she would change about them if she could.
Tell us about Insight.Out Financial and your professional career?
We are a friendly and approachable company with a wealth of expertise in pension transfers, personal & corporate financial consultancy. We make our experience and knowledge very accessible to our clients with our empathetic approach, but most importantly - our charges are transparent, fair and reasonable.
I started the company in August 2015 with the aim of building a business that is customer-focused and provides exception standards of service and advice, with professional ethics at the core of our proposition. We are based in Belfast, Northern Ireland, however we have a UK-wide clientele, and regularly visit all regions in Britain.
I have been a Pension Transfer Specialist since 1998, and have extensive experience in advising on occupational pension schemes, including Defined Benefit, Defined Contribution, as well as more specialist pensions for small business owners.
I am one of the first Chartered Financial Planners in the UK and am also a Fellow of the Personal Finance Society since January 2006, as well as a Chartered Fellow of Chartered Institute of Securities and Investments since 2012. I have continued with my studies, being awarded a Masters in Financial Planning & Business Management in 2012. I am currently working towards a PhD, with a focus on building consumer confidence in the financial planning profession.
What attracted you to the defined benefit pension schemes field?
I have been advising on Pension Transfers for more than 20 years. When I first started, there were very few advisers qualified to advise on pension transfers and a lack of knowledge and understanding of the value of the benefits offered and the impact for members of occupational schemes. The main reason for this was the highly complex legislation in place at the time, which was different depending on when a member joined and left a scheme. Pension simplification in 2006 did bring the personal pension and occupational pension regimes in closer alignment, and over the next 10 years, successive legislative changes, culminating in the pension freedoms legislation in 2016 have meant that more and more people need advice.
The advice for many of my clients with defined benefit schemes is life-changing. It is the biggest financial decision they will ever have to make, and will have the biggest impact on their, and their family’s future lifestyle. Changing demographics mean that the traditional “one size fits all” approach for most defined benefit schemes is less and less relevant. More and more people are looking for a different solution and wanting to shape their own personal retirement.
How do defined benefit pension schemes work?
Defined benefit schemes, often referred to as ‘Gold Plated Pensions’ are offered by companies for the benefit of their employees. Traditional style schemes provide a fraction of a member’s salary at retirement for each year they have been in service. For example a 60th scheme would provide 1/60th of a member’s final salary, multiplied by the number of years they had worked for the business:
For example:
John has worked for his employer for 27 years and is due to retire at the age of 65 with a final salary of £26,000. His pension income is calculated as 27/60ths x £26,000 = £11,700. The pension of £11,700 is payable from John’s 65th birthday and will increase in payment in line with inflation. It is guaranteed to be paid for the rest of John’s lifetime.
At retirement, most schemes will offer an option to take a cash free lump sum. This can be paid as a lump sum in addition to the pension, or by commutation where part of the income is given up in return for a lump sum. The maximum lump sum available is calculated using HRMC formula of (20 x pension) @ 25%, or another method set down in the scheme rules. If an alternative method is used it cannot exceed the HMRC maximum amount. A commutation rate is then applied to the lump sum to calculate the amount of pension that is given up in exchange for the lump sum required. The scheme actuary will set the commutation rate and this can vary greatly from scheme to scheme. Most public sector schemes use a standard 12:1 rate, however private sector schemes have more flexibility and may choose a rate which more closely reflects the cost of the pension given up.
For example:
John has an option to take a cash lump sum by giving up some of his pension. The maximum lump sum he can take is calculated at (£11,700 x 20) @ 25% = £58,500. If he wishes to take the full lump sum, he will have to give up a proportion of his pension. This is calculated using a commutation rate of 12:1. His reduced pension is calculated as follows, £58,500/12 = £4875, £11,700 - £4875 = £6,825 pa.
Many schemes will also provide death benefits for a surviving spouse or in some cases, other financial dependent. This will generally be in the form of a spouse or dependent’s pension, calculated as a percentage of the member’s pension. There are many variations to the formulas used by schemes to calculate these benefits and the eligibility criteria applied by each scheme when assessing a survivor’s entitlement to benefits, it is essential for members to fully understand these, especially where their circumstances are not straight forward. Some schemes will only pay death benefits to a legal spouse, where others have a more generous approach and will consider a life partner, where financial interdependency can be established. It is also important to understand that spouse benefits are not a contractual entitlement and are paid at the discretion of the trustees. Spouse benefits can be reduced and even stopped in some circumstances, e.g. where the spouse remarries or is even co-habiting.
For those in same sex marriages, and civil partnerships, it is especially important to understand the scheme’s eligibility criteria. Under current legislation, there is no compulsion on schemes to change their scheme rules to accommodate changes in legislation. Where rules have been amended, in some cases this will only date back to the date the relevant legislation came into force.
Most schemes will also guarantee to pay the member’s pension for a minimum period of time, generally 5 years but could be as much as 10 years. This in effect means that the member’s full pension will be payable for at least the period of the guarantee period. Any outstanding payments are paid as a lump sum and any spouse pension will commence in payment.
For example:
John retired at the age of 65 and unfortunately passed away after two years. His nominated beneficiaries will receive a lump sum of 3 x £6,825 = £20,475, plus John’s wife will start to receive a pension of £5,850 pa (50% of the unreduced pension), which is payable for her lifetime.
Most public sector schemes such as NHS, Teachers Pensions and many local government pension schemes, conform closely to this format, however since 2014, many have changed to a career average basis (CARE) to calculate benefits. Members earn a fraction of their earnings for each year which is increased in line with government published rate of inflation. These are accumulated each year to arrive at final pension entitlement. One of the biggest differences is that transfers are not available from unfunded schemes (e.g. NHS, Teachers schemes) unless going to another defined benefit scheme. Generally local government schemes do still allow transfers to a flexible pension plan.
Private sector schemes are much more varied and it is much more important to fully understand the benefits a member is entitled to. Each scheme will have their own individual combination of benefits covering the whole spectrum of how benefits are accumulated, how they increase in deferment for leavers and in payment from retirement, death benefits available, and entitlement to early or late retirement. Private sector schemes are also more susceptible to financial insecurity of the sponsoring employer.
What are the typical challenges that clients approach you with in relation to transferring their defined benefit pension?
Many clients are now much more aware of the options that are available from personal pensions with the introduction of pension freedom legislation. There is now much more coverage in the media, and availability of information via internet, informing consumers of the benefits of flexible benefits in retirement, and current high transfer values has prompted a huge increase in enquiries for advice.
The main areas of concern are:
- Flexibility & control – Many more people have a different outlook on retirement rather than working to 65 and then stopping there. People would like to consider winding down or even the possibility of a career change from a stressful job to something more enjoyable. Pension freedoms offers many more options that may be more suitable, however these are not available through a defined benefit regime.
- Availability and value of death benefits - Demographics have changed significantly in recent years and the traditional model, based on nucleus family, no longer works for many people. Families often have complex relationships where it may not be easy to identify financial dependency for one individual. Scheme rules vary significantly and the availability of spouse pension, or dependent’s pension is generally at the trustee’s discretion rather than an automatic right. This is specifically relevant for anyone in same-sex marriage or civil partnership as schemes do not have an obligation to change the rules to accommodate these arrangements, and even where they do on some occasions this will only be backdated to when the law was changed therefore people who believe they are entitled to benefits may not actually receive what they expect.
- Pension taxation considerations - pension taxation has changed considerably over the last 10 years, most significantly with the introduction of the lifetime allowance and annual allowance regime. Individuals, even with relatively modest earnings but a long career or people who have large increases in salary in a particular tax year could see themselves faced with a tax bill because their annual allowance has been calculated in excess of the £40,000 limit. Anybody with a pension benefit in excess of £50,000 per annum in a final salary scheme will face an income tax charge when they take their benefits. While it’s important to understand and quantify the implications of taxation, this does not always lead to a need to transfer benefits from a defined benefit scheme, and is only one of the factors taken into account.
- Financial security of the scheme - financial security is probably one of the most topical issues in relation to defined benefit pension schemes. With recent highly publicized failures such as BHS, Carillion and most recently - British Steel, this has become a matter of great concern for many people in final salary schemes. It is important to understand that where the scheme may have a deficit, the long-term financial standing of the scheme is based on the sponsoring employer’s ability to continue funding the scheme. The employer also has a legal requirement to make provision in their accounts for any shortfall in the scheme and agree a funding schedule with The Pensions Regulator which has to be approved and details published to members.
What can happen to scheme members’ defined benefit pensions if their employers become insolvent and the scheme doesn’t have enough funds to pay their benefits?
As mentioned above all schemes are backed by an employer’s covenant, and there is a charge over the employer’s assets effectively, which can be called on to meet scheme deficits. Where the employer fails and there are insufficient assets available, then there is the option of going into the Pension Protection Fund (PPF). This is a government-backed scheme funded by other occupational pension schemes and provides a level of protection for members where the sponsoring employer has gone into liquidation or otherwise failed. There are some limitations on the benefits that will be provided, in that only 90% of the benefit is guaranteed, and there is a cap on benefits which is, £39,006.18 (equating to £35,105.56 when the 90% level is applied) per year, from 1 April 2018. This is set by DWP. It is important to note that the government does not underwrite any guarantee provided by the scheme, on the compensation paid by the PPF is limited by the funds available.
What would you say are the specific challenges of assisting clients with defined benefit schemes?
One of the main challenges is helping members to properly understand the benefits they have accrued in the scheme and their value, and to dispel some of the myths and misconceptions that are prevalent at this time. It is essential to show the benefits in a proper context, and how these compare with the alternatives available. One of the ways we do this is by using cash-flow planning to project future inflows and outflows and compare this with the financial impact the members’ financial resources. This helps to show how achievable or not the retirement plans are, and to look at all the potential ‘what if’ scenarios, especially early mortality, poor investment performance and potentially running out of money if they were to transfer the benefits.
Another challenge is to explain the loss of guarantees, on the impact of charges and investment risk. It can be difficult to see past a large lump sum and consider the actual income benefits that the plan provides. When dealing with individuals who have little or no investment experience, and possibly, this will be the first time they have dealt with financial adviser sought advice of any kind, it is important to ensure that explanations are provided in a manner that the individual can understand and that the gravity of the loss of guarantees is properly explained and demonstrated.
In the progression of your career, how are you developing new strategies and ways to help your clients?
Our approach for dealing with all our financial planning clients is the same regardless of whether or not they have a defined benefit scheme. We take a holistic approach which takes into account the stated objectives and all the financial resources. We then complete our financial analysis which establishes their needs. In this way, we not only consider what the client wants, but what they actually need in order to achieve their goals in the future.
We have developed a very detailed, client-centric process, which focuses on communication and providing high levels of professional service to our clients to achieve their ultimate goals. We continually review and amend processes to ensure continued delivery of the promised services and to improve these where we can, and we are always investigating new and better ways to improve communication with our clients.
We are also embarking on a research programme to develop a specific investment strategy to match the flexibility and challenges provided by pension freedoms and flexible drawdown.
If you could, what would be the one thing you’d change about defined pension schemes?
It would be a great improvement for members of defined benefit schemes if there was more clarity in relation to what they should expect from financial advisers in the provision of advice. Also, clarification the obligations of trustees to provide the information required to enable financial advisers to properly assess the members’ benefits as part of this process. Currently, the Financial Conduct Authority regulate financial advisers as set out the standards for the provision of advice, and The Pensions Regulator sets out the obligations for trustees in terms of the provision of a statutory cash equivalent transfer value and the information it needs to be provided with that. There are no specific rules or guidelines laid down for trustees in relation to the information that they should provide to financial advisers, and on occasions this can cause problems and delays in obtaining the information in a timely manner.
Also, from a members’ point of view, more availability of partial transfers from defined benefit schemes will be greatly advantageous. Currently, while the legislation allows this, there is no obligation on a scheme to offer this to members.
What is your overall piece of advice for Finance Monthly’s readers in regards to defined benefit schemes?
Take time to understand the value of the benefits you have, in the context of your own personal circumstances. It’s important that individuals fully appreciate the exact benefits that they, or their family will be entitled to during their lifetime and in the event of death. Being offered a large lump sum of money can seem very attractive, however that money could run out at some point is important to ensure that they have a plan B that is realistic and feasible if this happens.
Do you have a mantra or motto you live by when it comes to helping your clients with defined benefit schemes?
This is the biggest financial decision they will ever have to make and it will have an impact on the rest of their and their partner/spouse lifetime. It is a huge responsibility on the shoulders of the adviser to provide proper and accurate advice, as there is no going back once this decision has been made.
Gary Scheer is the Founder and Managing Member of New Jersey-based Gary Scheer LLC, Complete Financial and Retirement Planning. His company’s unique process enables their clients to enjoy a bigger future through a comprehensive, holistic approach. By implementing creative financial and legal strategies, Gary and his team help them protect, preserve and pass on their wealth to have a big impact on their family, friends, and the causes they care most about. This month, Finance Monthy had the opportunity to speak to Gary and learn more about the retirement solutions that his company provides.
How should individuals in the US plan for early retirement? What options are available above and beyond a pension?
Retirement planning in the US is like having a three-legged stool. The first leg is a pension, the second leg is Social Security, and the third leg is one’s personal savings. Unlike during our parents’ working years, today most Americans do not have a pension plan. They may have employer-based programmes, such as 401(k) and 403(b) plans and brokerage accounts that they have used to accumulate money. However, these accounts may be very volatile and offer few, if any options to provide a guaranteed income for life. One of our tasks is to help people create predictable, guaranteed streams of income to supplement their social security and pension pay-outs. We utilise various financial and legal tools to make this happen. In addition, we’ll employ certain creative financial strategies to optimise the non-guaranteed portion of our clients’ portfolios to keep up with inflation and protect them from the potentially devastating costs of unreimbursed medical and long-term care expenses.
What would you say are the most common retirement plans that clients in New York and New Jersey look for?
New York and New Jersey are two of the most expensive states in the US in which to retire.This may become more apparent over time, due to the recent passage of the Tax Cuts and Jobs Act. This will limit the tax deductibility of state and local taxes, commencing 1 January 2018. Most Americans were taught that they should put as much money as they could into Tax Deferred accounts such as IRAs, 401(k) and 403(b) plans. Doing so enabled those to take a tax deduction in the year the investments were made. The money in the accounts was not taxed during the growth years and would only be taxable when the account holder retired and presumably dropped into a lower tax bracket. Many of our clients are shocked to learn that they are in the same or higher tax bracket in retirement than they were during their working years. Between having no more dependent children, little if any tax deductible mortgage interest, and no more tax deductible retirement plan contributions, nearly all of an average retirees’ income is taxable. In addition, investors who contributed to IRAs and employer-based retirement plans during their working years are forced to begin withdrawing from these accounts after turning 70½ through government mandated Required Minimum Distributions (RMDs) whether they need the income or not. Another surprise for many retirees is that their social security income may be taxed. Individuals earning $25,000-$34,000 per year in retirement may be taxed on up to 50% of their social security income. Those with incomes in excess of $34,000 may be taxed on up to 85% of their social security income. For married couples filing joint tax returns, the figures are $32,000-$44,000 and above $44,000 respectively.
What are the most common challenges that people in America face in regards to preparing for a retirement?
There are many risks and challenges that Americans face as they to people living much longer than company actuaries projected. As a result, due to longer life expectancies, those fortunate enough to have a pension are at risk that their former employer, whether a private company or government agency, may not be financially solvent to continue making their promised payments in the future. This may put extra stress on one’s personal savings in order to protect them in the event of potential pension fallout. In addition, since people are living so long, they run the risk of having many years of unreimbursed health to prepare to pay for retirement. One of the biggest and long term care expenses in retirement. This is known as the 'Longevity Risk'. By helping our clients take Longevity Risk ‘off the table’, all of the other risks that retirees must deal with such as stock market risk, interest rate risk, sequence of return risk, liquidity risk and legislative risk will rarely become an issue as people age.
What attracted you to this field? How challenging is it to work in an ever-changing regulatory environment?
In the early stages of my career, I worked primarily with middle management executives and small business owners in connection with their employee benefits, risk management and retirement planning. Then in 2000, a tragic event in my wife’s family changed the focus of my practice to retirement and estate planning. My wife’s grandmother was a frugal but loving woman who worked hard to provide for her three daughters. She owned a knitting store for over 50 years and had built an estate worth nearly half a million dollars. After her death in 2000, the family learned that the estate was nearly bankrupt and all that remained were several small pieces of jewelry which were fought over by the sisters. “How could this happen”, I said to myself; “Where did all the money go?” The answer - in 1994 my wife’s grandmother broke her hip and after a successful hip replacement surgery, went into a rehab/nursing home for 45 days of post operative care. She had one daughter living with her at the time who decided to keep her mother in the nursing home for 6 years at a cost of nearly $400,000! I was shocked and saddened no one had consulted a financial planner to look at alternatives to nursing homes and implement strategies to protect the estate of a woman who worked so hard to build her legacy. This stirred a passion in me to help other families and people near retirement age to protect the wealth they have worked so hard to accumulate. Since then, the financial services profession has become one of the most highly regulated fields in our country. In 2016, the Obama Administration issued new Department of Labor (DOL) Rules mandating that financial professionals offering financial advice involving retirement assets operate as Fiduciaries and "act in their client’s best interests". While one would hope their adviser will recommend products and services that are in a client’s best interests and not merely what is suitable’, when the government gets involved and mandates what private companies should and shouldn’t do, compliance expenses commonly rise dramatically and cause advisers to stop working for smaller clients, the ones who were supposed to benefit from such legislation. Currently, the Trump Administration has put some of the more onerous requirements of the DOL Ruling on hold for further investigation.
How has retirement planning in the US changed in the past 35 years?
In the early 80s, IRAs and 401(k) plans were relatively new. People typically worked for one company for their entire careers, retired with a pension; and along with Social Security, had enough money to enjoy a retirement with few, if any, financial worries. Since then, most private US employers have disbanded their pension plans and offer Defined Contribution Plans such as 401(k)s that require employees to fund a large percentage of their retirement nest eggs. These plan participants have been forced to become their own pension and retirement plan managers with minimal education, training and experience and a limited selection of funding options for what for many is their greatest single financial asset. According to the Society of Actuaries, if a couple is married, there's a 72% chance that one of them will live to age 85 and a 45% chance that one will live to age 90. As a result, having a plan to cover health-related expenses and not run out of money is more critical than ever before.
What is the single most important piece of advice in regards to retirement you would offer to American people?
It is a lot more challenging to plan and implement how to manage one’s assets in the distribution phase of their investment life than during the accumulation stage. This is not a do-it-yourself proposition. Hire a Fiduciary Financial Adviser who specializes in retirement distribution planning to put the odds of success in your favour.
Website: http://garyscheer.com
The time of true financial freedom has likely already arrived for those born on or before 1st September 1953 (Baby Boomers), but the future is not looking so bright for the Millennial generation (born between the early 80s up to 00s), who will face a more expensive and far longer financial struggle – according to a new study.
The study, which was carried out by retirement finance specialists Age Partnership, set out to find the true age of ‘financial freedom’ for the Millennial generation – with some interesting stats uncovered along the way.
Millennials (otherwise known as Generation Y) who began work at 21 and spend their younger years saving for a deposit, do not take out a mortgage until they reach an average age of 30. And to make matters worse, once they have a mortgage they will then spend 50% of their entire monthly income on bills!
Taking a look at earnings, the average wage for a Baby Boomer started at £10,140.96 in their first job aged 19, and were given an average 1.9% pay increase year on year, resulting in average lifetime earnings of £599,429.42.
This is comparable to today's Millennials, who have experienced a starting wage of £13,533.12 on average at the age of 21, with yearly pay increases of 3.7%, earning them up to £1,803,718.11 in their working lives.
Those born between 1940 and 1964 usually took out their first mortgage at the age of 22, with houses at the time costing around £4,975 at the start of the 1970s. According to the study, mortgages taken out by Baby Boomers typically took 33 years to pay off.
This is a huge difference to Generation Y, who battle housing costs of upwards of £220,000 on average, and who do not take out a mortgage until the age of 30. It may sound like the Baby Boomer generation had it easy when buying a home, but they were faced with fluctuating high mortgage interest rates of up to 16%, whilst Millennials are currently enjoying lows of around 4%.
Research also showed the average age of a first-time mum in 1980 was 23.5 years old, compared to Millennials who are waiting until they reach on average 28.6. The cost of raising a child who reached adulthood in 2003 was £140,398, whilst the starting costs for Millennials having children in 2013 begins at £222,458 taking into account factors such as childcare, holidays, hobbies and food, and we are yet to see how the economy will shape the true amount spent once these children reach age 21 in 2034.
By the time parents reached 51 and a half, most Baby Boomers offspring had moved out and become financially independent. This compares to the age of 58.6 for Millennials parents, as it is predicted that their children will be living at home until the age of 30 (at least), further increasing the cost of having children for Millennials, from an already hefty 25.2% of lifetime income.
Age Partnership's study revealed that the general age of retirement for Baby Boomers was 59.6 years old, but unfortunately Millennials won't be retiring until the age of 68. Not only that, but Generation Y also incur an additional cost of travelling for work, which can add up to a grand total of £90,826 over their entire working life.
All of this combined means that the Millennial generation will have paid off their mortgage, finished shelling out for their children, and finally retired, just one week before they reach the ripe old age of 70 – if they're lucky! Meaning 70 is the age of financial freedom for the Millennials.
Tim Loy, chief executive at Age Partnership, commented: "Retirement can be an opportunity to live the way you have dreamed about all your working life, whether that be taking up an interesting hobby, or travelling the world. Juggling finances as we come across necessary obstacles in our lives can be challenging, which is why it’s important for people to have access to information which will help them to make informed decisions about their future.
"Having a good idea of when you will be financially free can help you to enjoy your retirement to the fullest, getting the best quality from life, which is exactly what we aim for when helping our customers."
(Source: Age Partnership)
- UK pensions still facing a £779.9 billion deficit (end March 2016, full buyout basis)
- Investment in UK companies continues to decline, now below 7% of scheme assets,
- Special contributions by employers cost £10.5 billion in the first half of 2016
- Active scheme membership falls below 1.5 million
The Pension Protection Fund has today published its annual Purple Book analysis of the state of health of the UK’s final salary pension schemes. The data covers 5,794 schemes and shows that in spite of substantial additional employer contributions and positive stock market returns, UK employers remain a staggering £779.9 billion in debt to their current and former employees’ pensions. Even on a s179 basis, which is the amount required to meet PPF level benefits, schemes are showing an aggregate deficit of £221.7 billion.
Special contributions are one-off payments in excess of the annual funding commitment, specifically to reduce a scheme deficit.
By contrast to the relatively low levels of defined benefit scheme membership in the private sector (public sector schemes are not covered by the PPF), there are now around 10.5 million members of defined contribution pensions.
Tom McPhail, Head of retirement policy, Hargreaves Lansdown commented:
Funding
“Scheme members have built their retirement plans on promises made by their employers. It is now up to those employers and the pensions industry to deliver on those promises. There should be no compromise over the level of benefits, no sneaky watering down of inflation-proofing terms to get the schemes off the hook.”
“Looking forwards, the future lies with defined contribution pensions. Too often the transition away from final salary pensions has been accompanied by massive cuts to employer contribution rates. The average defined benefit scheme employer contribution is 16.2% of earnings, compared to just 2.5% going into defined contribution plans. This trend in reducing contributions has to be reversed.”
Consolidation
“Consolidating some of these legacy pension schemes would be technically challenging but worth pursuing. It costs two to three times as much per member to run a small scheme as a large one, with consultants, independent trustees, actuaries, accountants and lawyers all taking a cut. Fewer, larger schemes would mean better security for members and lower costs for employers.”
Investment strategy
“The relationship between employers and the UK pension system has changed significantly in the past ten years. Pension schemes used to be owners of UK companies as well as being funded by them. Now, the bulk of scheme assets are invested overseas or in bonds. What’s more, as schemes mature, they will increasingly become net sellers of assets. Pensions being used to help finance the growth in British companies is becoming a thing of the past; instead our savings are either being lent to the government or invested abroad.”
The weighted average asset allocation to Equities has fallen from 61.1% in 2006 to 30.3% today; of this equity allocation, the proportion invested in listed UK shares has fallen from 48% (2008) to 22.4% in 2016.
(Source: Hargreaves Lansdown)
Balfour Beatty, the international infrastructure group, has announced that it has agreed heads of terms with the Trustee of the Balfour Beatty Pension Fund to re-profile the £85 million (€116 million) pension deficit payment, agreed at the time of the Parsons Brinckerhoff disposal, over eight years.
As stated in the trading update on 22 January, and following the decision to cancel the £200 million (€272 million) share buyback, the company entered into negotiations with the pension fund Trustee to re-profile the £85 million (€116 million) pension deficit payment, originally due in 2015. Under the heads of terms it is intended that the pension fund will participate in a Scottish Limited Partnership into which the company will be transferring PFI assets worth £85 million (€116 million). The £85 million (€116 million) pension deficit payment will then be made over an eight year period, starting with a £4 million (€5.5 million) cash payment in 2016 and increasing annually thereafter.
Leo Quinn, Balfour Beatty Group Chief Executive said: “We are pleased that the pension fund Trustee has worked with us to re-profile the pension payments, in light of the cancelled share buy-back. This gives a clear plan on how the pension deficit will be reduced over time, whilst maintaining balance sheet flexibility as we drive the required organisational change and performance improvement, as set out in the Build to Last programme we announced last week.”
Adrian Mathias, Chairman of the pension fund Trustee said: “We are pleased to have reached agreement with the company on this matter. We recognise the importance of a strong balance sheet to the company and welcome the opportunity to participate in the proposed Scottish Limited Partnership.”
