Retirement Webinar: Pensions for Business Owners

Retirement Webinar: Pensions for Business Owners

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Hello and welcome to the session on pensions for  business owners, my name's Eoin and I work in the   financial wellbeing team within Hargreaves  Lansdown and during the course of the next   20 minutes or so we'll be discussing some of  the elements of pensions personal pensions   and how they may well assist people who have their  own businesses. So none of the information that   I'll be giving should be construed offers  financial advice, really it's just trying   to put you in the best position possible when  you're trying to decide how to make provisions   for your future. If you feel that you do need  specific advice then that is a separate service   offered by Hargreaves Lansdown so do get in  touch with our help desk to find out more So the presentation itself will be going into  various examples of how pensions work and how tax   relief works. So undoubtedly they're not going to  apply to everybody and everybody's circumstances   but really it's it's just designed to  give you a bit more understanding of   how a pension can help get you to to the point at  which you you possibly want to retire and generate   that income in retirement that you think you  may need to sustain your lifestyle in the future So retirement is is a funny one, everybody is  different in terms of what it is they want to   be doing in retirement and not everybody  will look to have the same retirements   so there's there's quite a few studies that have  been done into retirement and levels of income   that on average people will need to live certain  kinds of lifestyle and also looking at the kinds   of pension pots that that on average people  have at various points throughout their lives.   So it's the case that a couple of years ago 16%  of self-employed people are contributing into a   private pension, in the late uh 1990s that was  more like 48% so we've seen a big drop in the   amount of self-employed people that are actually  contributing towards a pension for their future.  

On average private pension values tend to be at  their highest at some point in people's late 60s   early 70s around about 206 000 pounds is a sort of  fairly average personal pension pot at that point   and it's estimated that in order to live a  moderate standard of lifestyle in retirement   if you're in a couple you'd need just over 29  000 pounds a year and we'll go into a bit more   detail on on what moderate means and other  kinds of lifestyle that people want may want   in retirement and the kinds of income that it's  thought that people should be trying to secure So where's your income going to come from when  you are retired. The first source of income   for many people will be the state pension  and the state pension is what you receive   for paying national insurance contributions  throughout the course of your your working life   and in order to receive the full state  pension you need to have paid national   insurance contributions for 35 years across your  life and if you do that then the amount you'll   receive from the state will be 9 340 pounds a  year in today's terms so that's the state pension   as it is for the current tax year although  things are subject to to change. However the   age at which that state pension kicks in has  recently gone through a process of increasing   and it did used to be the case that the state  pension kicked in at 60 for women and 65 for men   however they've equalized the women's state  pension age in line with men at 65 and then   over the last few years have been pushing that  up to 66 and then it's moving up again to 67   and then for anybody born after April 1978 state  pension age is due to rise further up to 68.   So whilst just over nine thousand pounds a year  isn't a bad amount of money in itself it will   probably go a long way to covering most people's  basic bills and living costs. If it's not going   to kick in until your late 60s many people will  have wanted to have had some form of retirement a   reduction in working hours or or full retirement  potentially before that state pension age   so it is really important to have your own pension  provisions to give you a bit of flexibility about   firstly when you retire but then also the kind  of lifestyle that you will lead in retirement. So a pension works in a way  that you pay money into it   and money that you pay in benefits from tax  relief or a tax saving so that's the government's   incentive to get people saving for the future  is they give you the tax back on money that's   paid into a pension, subject to certain limits.  And then once that money is in your pension pot  

you can choose how that gets invested and the  investment side of things is really important.   It may not be something that people have  necessarily considered before but trying   to get the best investment growth you possibly  can is really important because those two things   together how much you pay in and how well your  investment performs they combine to build that   pot of money up and it's that pot of money which  will then sustain you hopefully in retirement.   The earliest point that you can access that pot  is from 55 onwards although that is being linked   to the state pension age. So 10 years before state  pension age is the earliest point you'll be able   to access the money in the future so we'll go  up to 57 and ultimately 58 our state pension age   rises on an ongoing basis whatever you've built up  in your pots you can withdraw 25 percent of that   as a lump sum tax-free and then the balance  is yours to generate your pension income   so the bigger the pots bigger the lump sum you  have and the bigger the income in retirement So I've already mentioned a couple trying to live  a moderate standard of lifestyle in retirement   would need an income of about 29,000 pounds a  year between them this is based on information and   research done by the pension and lifetime savings  association. Year before last when they looked   into retirement and tried to come up with some  of the the more standard costs and outgoings that   people would would incur and then look at some of  the slightly more luxury things that people might   like to do and they then categorized retirement  into three different areas. The minimum standard  

of lifestyle a moderate standard lifestyle and  a comfortable land a standard of lifestyle.   So in order to achieve a minimum standard of  lifestyle if you're an individual in retirement   you need an income of just over ten thousand  pounds a year or between two and a couple,   fifteen thousand seven hundred pounds a year. So  for people in that situation the state pension   is likely to go most of the way to making up  your income and really as the name suggests   that is the the minimum required to pay your  bills, shopping and get by really in retirement.   The moderate standard of lifestyle which we  assume most people are probably trying to target   uh requires an individual to have an income  just over 20 000 pounds a year and again a   couple an income of 29 000 pounds a year so the  state pension will again go some way to covering   covering that but then that does then leave a bit  of a gap to for individuals to try and save a bit   more themselves into personal pensions to try and  top that that amount up and the moderate standard   of lifestyle would give you the ability to  uh go abroad for for two weeks each year   eat out once or twice a month, so you'd still be  able to do some of the slightly more interesting   things that you might have done whilst you're  working and as well as paying your bills.  

The really comfortable standard of lifestyle would  require an individual to have about thirty three   thousand pounds a year as a retirement income  and between two in a couple forty seven and a   half thousand pounds a year and this would  then be for somebody who's looking to renew   their car every couple of years spend a longer  period of time on holiday potentially abroad   have a more expensive weekly food shop some  of those things which aren't a necessity as   such but but maybe things that you have  depending on your personal preferences. So in order to retire then in London,  so if it were the case that you you   lived in London and had worked your life  in London and wanted to retire there then   it's likely that you would actually need slightly  more due to things being slightly more expensive.   These figures normally assume that you've got  somewhere to live that you don't then have to pay   for in retirement and so often people's costs do  dip when they come to retire but it's still still   a good idea to have a really good level of income  or the best level of income that you possibly can So for somebody who we're looking to build up  that moderate standard of income in retirement   we then worked back and it suggested that  in order to to get a pot big enough to give   you the moderate standard of lifestyle in  retirement you need to contribute about 12%   a year of your salary over a 50-year period.  So starting work at 18 and finishing work  

at 68 so a really long period of time  many people possibly won't be working   that long so for every three years less that  you don't want to work or you haven't worked   you need to contribute an extra percent into  your pension so if you only wanted to work for   42 years which is possibly a bit more average then  you'd need to contribute around 15% of your salary   into your pension so that gives you an idea of the  kind of contribution required over a long period   of time to build up a pension pot capable of  giving you a good level of income and retirement So how do those contributions get made for  people with their own business it will depend   on on how you're set up. If you're a  sole trader then you're contributing   any contributions you make individually are are  net so it's via relief at source and I'll explain   a bit more in a moment but really what it means  is when you put money into the pension it then   benefits from tax relief at whatever your marginal  rate of income tax is. If you're a director of   your own company then you can make contributions  from your salary that you're paid by the company   and that could be done via salary sacrifice,  saving tax and national insurance but you can also   pay contributions in from the company directly  which then the tax benefit is is for the company   and may may save corporation tax so it depends  how you set up as a business but there are ways   of getting money into the pension that are tax  efficient. So the relief at source method which   I mentioned firstly for for sole traders you would  have been paid your income whatever it is which   has had tax and national insurance taken from  it, you could then pay that into a pension pot   and at the point you do that the pension provider  will claim basic rate tax relief on your behalf   if you're a higher or additional rate taxpayer  you then have to claim any higher or additional   rate tax back from HMRC. Typically done via a  self-assessment tax form but if you don't do one  

of those then you can write to HMRC and notify  them that you've made a pension contribution   when contributions are made via salary  sacrifice or salary exchanges, the other term   simply the the money is deducted by the company  rather than being paid to you and as a result it   doesn't have any tax or individual tax on national  insurance taken from it. You can then pay that   money into the pension so there's nothing further  for you to reclaim because it's not had any tax   taken from it in the first place and crucially the  the national insurance saving is also made as well Because of those generous tax benefits, the  fact that you you can receive tax relief at   whatever your your marginal rate of income taxes  and then potentially national insurance as well,   there are limits on how much you can pay into  the pension and benefit from tax savings on.   So you can't pay in more than you earn across  the course of a tax here and there's that's   then subject to an annual allowance which is  40 thousand pounds for the majority of people   if you're classed as a high earner by the  government, so if you have adjusted income   in excess of two hundred forty thousand  pounds or more then the amount you can   pay into the pension starts to reduce.  So do let us know if that's the case   you can then also look at previous tax  years and carry forward unused allowances   into the current tax year to enable you to to  make a higher level of contribution and pension   pots that you build up are then subject to a  lifetime allowance of a million and seventy three   thousand one hundred pounds which is the total  figure that you can build up in your pensions.   Anything over that you then start to pay a  punitive rate of tax when you come to draw it out   so these figures are subject to change so  they're all appropriate for the current tax year   but to keep an eye on the budget in  future years to see if any changes   get made to how much you  can pay into your pension. So the kind of pension that is available  through Hargreaves Lansdown is known as a SIPP   or self-invested personal pension and again this  allows you to make contributions into it and   receive tax relief for whatever your marginal rate  of taxes and we're a really big well-established   company with with a long record of providing  personal pensions, with a a help desk on hand   to assist in making decisions. Be that how much  you're paying in, how it works, how you then  

decide for the money to be invested. We don't  provide specific advice so it is still then up   to you to make a decision and whilst the help desk  and various sources of information on the website   will give you loads of detail it's still then up  to you to decide what it is you actually want to   do but there is there is a lot of assistance from  us regarding selecting investments so even if you   haven't previously been involved in that side  of things with pensions before please don't let   it put you off and think that it might not be for  you because there is so much assistance available. So when that money goes into the the pension  pot, getting the best level of investment   growth you possibly can is key and sounds  quite straightforward but the higher level   of growth you receive will result in  you having a bigger pot in the future.   So in this slide somebody starting off with 30 000  pounds in their pots if they invested that for 30   years and it grew at 1 each year they'd have  just over 40 000 pounds in thirty years time,   if they grow at four percent each year they'd  have just over ninety seven thousand pounds,   and growing at seven percent each year they'd  have two hundred and twenty eight thousand pounds.   So just a couple of percent better growth each  year compounded over a really long period of time   gives a much bigger pension pot, but in order to  achieve growth rates at those higher levels you   may find yourself needing to consider investments  which have a higher level of risk associated with   them and risk is really the chance of that money  fluctuating in value for the period of time it's   invested for. So different investments perform in  very different ways and this line shows how cash  

has performed over the last 25 years so cash is  seen as a relatively secure way of investing your   money it's it doesn't dip in value but when held  for a long period of time cash may not keep pace   with inflation, and inflation being the rise in  the cost of everyday goods and services and that's   certainly what we've seen over the last 25 years,  somebody who put cash in the bank 25 years ago if   they took it out today and tried to buy the same  amount of things they were able to 25 years ago   they wouldn't be able to, so prices have  gone up quicker than interest rates on cash.   This line shows how gilts have performed  and gilts are loans to the UK government,   so by lending your money to the government you're  taking on a bit more risk than holding it in cash   but they are traded investments and  they go up and down in value. The UK   government is seen as quite a secure borrower  so it's it's still not necessarily seen as a   highly risky investment but there  is more risk associated with cash   and as a result you would hope the  return over the long term would be higher   and this line illustrates an investment into the  UK stock market or shares, and shares over that   long period of time have comfortably outperformed  the other kinds of of assets but you'll notice   that they're characterized by big dips along the  way, most noticeably this time last year where the   global lockdown started and there was a big dip in  the value of of shares. The value of companies the   recovery over the course of the following year  has been relatively strong so broadly they're   back up to where they were this time last year um  but often the level of risk that people will take   is again quite a personal thing and it's something  that only you will know what's right for you So with with a pension again a common way of  getting your money invested is by giving it   to a fund manager and it's that manager's job  to then choose the kinds of investments your   money goes into, so you're not necessarily  having to choose individual companies or   guilts or bonds or whatever it might be. You're  instead choosing a fund manager who will then   manage the money in a certain way and different  fund managers specialise in different things.  

Some will specialize in buying shares of American  companies or UK companies or big global companies,   others will take a mixed approach and invest  into things like shares as well as bonds   and all cash too so trying to pick a fund  manager who suits your own attitude to risk   and your own aims is really important and that's  where Hargreaves Lansdown do a lot of research   and offer a lot of information to try and help  people in making those kinds of decisions. So there's about 3000 different funds that  are available. Different fund managers,   they will cover a whole range of different things  so if you're really interested in investing or   investment themes and there's something that  particularly interests you or excites you,   then chances are there'll be a fund who who's fund  manager buys companies that operate in that area.   But from all those different funds we've  condensed who we feel to be the best   funds and fund managers in the major sectors  down into a list called the wealth shortlist,   and these are funds that our research team think  have the ability to outperform over long periods   of time and we're keeping a constant eye on  these funds and fund managers and there's a level   of governance from us so that if we feel that  they're not performing and you've chosen one of   those funds then then you get notified. So there's  always assistance from us on an ongoing basis from   that that short list we then condense it further  down into ready-made portfolios which will be   based on the attitude to risk you feel that you're  comfortable in taking whether or not you're happy   being adventurous or medium risk or conservative  somewhere a bit lower down the risk scale and what   our team have done here is rather than giving  you a load of funds, they suggest five or six   different funds which might suit a certain type of  investor. It is then just a framework for you to   go off so if you look at look at a portfolio and  think you don't like the look of one fund or a   couple of funds and want to add your own in that's  absolutely fine. It's not specific investment  

advice it's really just giving you an idea of  how we think a good portfolio can be constructed   from the the funds that we're particularly keen  on. Alongside funds it is also possible to use   your SIPP with Hargreaves Lansdown to invest  in individual company shares so if you want to,   to buy listed investments on a recognized  stock exchange then you're able to do that.   So there's a whole range of other investments  for those people looking to be much more hands-on So I mentioned the master portfolios. This  is just an example of what they look like,   so you would select the level of risk you're happy  taking, enter the size of pension pot you've got   built up, the lump sum or the amount you're paying  in monthly on an ongoing basis and it then gives   you an idea of the different fund managers and the  funds that they operate. Whenever you see a fund   highlighted in blue if you click on that name of  the fund it will take you to the fund fact sheet   so that you can find out a bit more about  how the fund is run, why we like it, what   they're investing into and crucially how they've  performed over the last five five years. As well   on the right hand side of the page  you can then see the suggested split   and this is where you can tailor it further  to your own uh your own views if you were   particularly keen on an area or a sector  and you wanted to invest more into that   and less into something else then you  can just tailor that to to your own views Also having one eye on how you actually access  your pension is really important too. Not all  

pension providers will offer a full range of  services when it comes to retirement and broadly   speaking when you do come to retirement the  different ways in which you access your money are   via an annuity, which involves you transferring  your pension pot to an insurance company who will   then give you a guaranteed level of income for  life and the ability to take up to 25% of the pot   as a lump sum tax free at the start the annuity  then gives you that security knowing that whatever   the income is that's set up will then just  pay to you for the rest of your life you can   elect to have the annuity paying to a spouse or a  financial dependent as well you can also build in   things like inflation linking so it increases  each year in line with a measure of inflation   often the more things you build in the lower the  income you'll receive to start with but it's it's   important to get it right for you because once  an annuity is set up you can't then subsequently   make changes to it and if you have any medical  conditions then uh anything that might be seen to   shorten your average life expectancy the annuity  company will actually pay you more to begin with   because they they might assume that you're not  going to be receiving the annuity payment for for   as long as as average so it's really important  if you decide to go down the annuity you really   explore that uh very well and Hargreaves Lansdown  are one of the largest annuity brokers in the UK   so we can certainly assist with that the other two  methods draw down or uncrystallized fund pension   lump sum or off plus withdrawal are both something  that Hargreaves Lansdown provide directly   drawdown gives you the ability to keep your money  invested and you then withdraw an income from that   again at the point you enter into drawdown you can  take 25 percent of the pot tax free as a lump sum   anything further that you then withdraw  is subject to income tax at marginal rates   where the money is still invested it has  the ability to grow over the long term   and ultimately you may get back  more than you've you've put in   but also that is one of the risks withdraw down  that if your investment isn't growing in value   each year and you then still want to take money  out from it your pot might diminish at a much   quicker rate and you may run out of money before  you pass away young crystallized fun pension lump   sum it allows you to rather than moving all the  money into drawdown on a one-off basis you can   just take chunks out of the pot and each time you  do that 25 is tax-free the rest taxed as income   so both those methods are known as flexibly  accessing your pots at the point you do that if   you were to flexibly access your pot the amount  you can pay into the pension going forwards is   capped at four thousand pounds each year that's  known as the money purchase annual allowance so that's uh how your pension would work in  retirement if you decide to save outside of   a pension um then there are other accounts which  still give you the ability to hopefully benefit   from rising stock markets over time and choosing  your own investments so with Hargreaves Lansdown   we operate a normal fund and share account which  gives you the ability to buy and sell investments   with no particular tax advantages there's a  cash ISA which gives you the chance to hold cash   and receive a rate of interest and on the interest  any cash held within a cash ISA you don't pay any   further taxes on the interest and that's the  same with stocks and shares ISA so investments   within a stocks and shares ISA if they grow in  value you'll then exempt from having to pay any   further taxes on those be it capital gains tax  or taxes on any any dividends there's also then   a product known as innovative innovative finance  ISA. Hargreaves Lansdown operate a Lifetime ISA   and there's also a product called Active Savings  which again is a way of getting cash invested   and making sure that you're getting the best  rate of interest possible on those cash savings so the Lifetime ISA is one which is  is a particularly interesting one   so it's available to anybody between the age of  18 and 39 and you can pay in up to four thousand   pounds each tax year and receive an uplift from  the government of 25% of whatever it is you pay   in up to four thousand pounds so if you paid the  full four thousand you get a thousand pounds from   the government paid into the accounts that money  is then invested so you can choose to again invest   that and hopefully over time grow the investments  and when it's within the the ISA it's uh the   investment growth is exempt from from any capital  gains tax in the future that money can then be   used for for a range of different things so if  you're looking to purchase a first-time property   um then you can withdraw the money and you don't  have to pay any penalty on it there's no tax   charge to go back to the government alternatively  if you're not using it to save for a first time   property the money can remain in there until the  age of 60 and if it remains in there until the age   of 60 then when you come to access it after 60 you  don't pay again any penalty on it if you decide   to access the money before the age of 60 uh not to  buy a first-time property then you would pay a 25%   penalty back to the government so it does give  you a bit of flexibility if if you're thinking   of putting money away for the future but you're  concerned about the ability to to access it but   the ability to access it comes with the potential  of having to pay a penalty back to the government when you're weighing up whether  or not a pension or a Lifetime ISA   um might be better in your circumstances the the  two uh whilst they offer some similarities that   there are some quite big differences as well  so the pension any contributions into that you   get tax relief at your highest marginal  rate so if you're a higher rate taxpayer   you get 40% tax relief or an additional rate tax  pay you get 45% tax relief and you can pay quite   a bit more into the pension so subject to that  annual allowance of 40 000 pounds that we spoke   about earlier both accounts have a wide range of  investment options when the money is in either the   pension or the Lifetime ISA the investment is free  from from further taxes the pension the earliest   you can access the money is rising to currently  55 rising to 10 years before state pension age   so going up to 57 in 2028 with the lifetime isa  again as we just mentioned you can either take   the money out to buy a first-time property  or you keep it in there until the age of 60.   with the pension when you access it whatever  you come to take 25% of it is is tax-free and   the rest is then available as a taxable income  by one of the options we we discussed earlier   the lifetime isa is after the age of 60 doesn't  have any tax applied to it so you can just take   it out as and when you want it and it's just a pot  of money so yours to withdraw whenever um but if   you are taking it before the age of 60 not to buy  the first time property then you pay a 25 penalty so having your account with Hargreaves Lansdown,  if you do decide to have multiple ways of saving   through as a pension, Lifetime ISA, fund  and share account, whatever it might be   it's all operated through the one account so you  would log into the one system you would then be   able to see the various different accounts that  you might have set up it's all monitored as well   through an app which is free to download if you  just look at hl in the app store and that will   then give you the ability to see the pots of  money that you're beginning to accumulate and   we have a help desk who can provide again much  more assistance and guidance around your pension   and around investments they won't be able to  provide advice but it's really useful especially   if you're new to pensions or savings and you are  just looking to find out more information about   how these kinds of accounts might help you do get  in touch and ultimately have a look at the website   as well because there's loads of information  on there which will help you make a decision So I hope you found that presentation  useful um I'll leave these important   investment notes on the screen for a  moment and if you could just have a   read through them and then I'll put the  contact details up again in a moment. Great, thanks very much for listening  everybody again I hope you found that useful   and if you do have any questions feel free  to send an email thanks very much bye.

2021-05-09 13:41

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