Many savers might scoff at the Pension Lifetime Allowance and dismiss it as a problem for rich people. Indeed, the idea of the £1 million limit does seem like something that’s not really for most of us to worry about. Yet, given the length of time we spend saving for retirement and the help we get from our workplace, you might be surprised when you do some sums.
It’s strange to me that so many people worry so much about Inheritance Tax, something that actually only around 5% of estates end up paying, when the lifetime allowance is looming and far more likely to affect you.
Consider this. You start saving into a pension at age 25. Under auto-enrolment, 8% of your £30,000 salary goes into your workplace pension – that’s £200 a month. And before you moan that 8% is too much, firstly it’s the current minimum and secondly, remember 3% of that comes from your employer and 1% effectively comes from the government through tax relief. So, actual cost to you: £100 a month.
If you increase your contribution by 5% a year – so that's £200 a month in year one, £210 in year two etc – and your investments return 6% a year every year until you retire at the ripe old age of 68. Well, you’ve passed the limit. Welcome to tax bill land. See? And all that time you were worrying about IHT.
So how do you avoid being lumped with a fat tax bill when all you want to do is retire? As you notice your pot creeping closer to the limit, you might prioritise using your Isa allowance over your pension, but there are also protections which might kick in to help you. Like other hideously complicated areas of finance, where getting it wrong can leave you out of pocket, this is definitely one of those times when a financial adviser can help.
Growth Over Income
We know you love dividends. We know because you like to read our monthly update of top dividend-paying stocks, because you enjoy our articles about how to invest for income, and you like to hear from your favourite income fund managers.
But why are so many investors obsessed with income? Because the truth is, that for anyone in the accumulation stage of their investment journey (i.e. you’re not yet retired and taking an income from your savings pot), it’s growth you should be thinking about.
This week we dared to give you six reasons to consider ditching dividends, or at least moving them down your priority list. Now, before you hit the “unsubscribe” button, I’m not saying you should avoid dividends or that they’re bad – I’m just saying they’re not the be all and end all of investing. Assets like infrastructure and renewable energy can supply an income if you need it and top-slicing is often underestimated as it puts you in charge of paying your own income from your profits. Dividends are just one tool in an investors’ income kit, but they’re not the only one.
Markets and Marriages
It’s crazy to think that it’s been over a year since we started to feel the effects of the Covid-19 pandemic. It was in February 2020 that stock markets started to get very jittery about the fallout from this as-yet-barely-understood virus. I can hardly believe I’m now in my 12th month of working from home (or that my husband and I are still on speaking terms).
So I was interested to hear the reflections from my colleague Christine Benz this week of what we’ve learned – if anything – from this experience. I think the main shock for many people, and particularly those who have only joined the investment party in recent years, is just how quickly the market can sell-off and also how quickly it can bounce back.
Many people may have been surprised to see how little the movements of the market often have to do what’s happening in the world around us – to see it rise and rise, as the outlook for our health and our economy gets worse and worse.
I hope that no investors have been left too scarred by the turmoil of the markets. As Benz and my colleague Ben Johnson both point out, anyone who stayed the course last year was well-rewarded. And if your investments have worked out better than your stay-at-home-with-the-husband, at least you can use those returns to put up some kind of partition in the house. That's one reason to stay in the market that no-one ever talks about.
