Tag Archives: finances

What will I need to retire?

The golden question when it comes to retirement planning is determining how much you will need to accumulate to successfully stop working, while maintaining your lifestyle.

Although it is beneficial to simply save as and when you can; obtaining a specific goal can provide much needed focus, and urgency, to prevent you from putting it off for that extra year.

A quick internet search will produce many basic calculators and statistics to give you a broad average of household expenses, and the lump sums required to meet these needs. The Office of National Statistics indicated a gross income of retired households as £29,000 in 2016, and Which? Has estimated an income of £26,000 being required to retire comfortably.   In our experience these generic figures are not overly helpful for our clients, as everyone has a unique set of circumstances and needs.

Although it is impossible to predict the future, and with it your precise needs at retirement, a good start is to look at your lifestyle today, and the known factors that will influence your future spending.

Begin by looking at your regular expenditure.  A good way of doing this is looking at your bank and credit statements for the last three or so months.

When looking at this, try to break down your spending into different categories of importance. An example of the categories is below:

Category Summary Examples
Essential You cannot live without these Mortgage, Bills, Groceries, Transport, Looking After Dependants
Basic It is not worth living without these Socialising, Hobbies and Interests
Luxury Enjoyable, but unnecessary to live Home Improvements, Holidays,

Higher End Restaurants, Trips

Aspirational Very enjoyable, but wholly unnecessary Yachts, Fine Wine Collections,

Multiple Homes, Vintage Cars


Naturally these examples will vary from person to person, and within each category there will be an order of importance, but by looking at your current habits, and splitting them up in this manner, you can get a basic idea for the bare minimum you will need upon leaving employment, as well as what would be required to lead the life you wish to lead.

My reference to ‘known factors’ above will include situations such as the mortgage being paid off in ten years, or that you will stop commuting at retirement.  There are also some less tangible factors, which are important, but harder to estimate- for example you will have more spare time at retirement, which may increase your socialising and holidays.  Use these factors to help refine the predicted amount of income required.

After this exercise you should have a general indication of what is required to meet each ‘category’, in today’s terms. For example your essentials may be £12,000 per annum, to meet your basic costs increases this to £22,000, to meet your luxury costs would raise this to £36,000, and to buy, insure, and maintain the yacht you have always dreamed of would increase this to £150,000 per annum.

This is a time to stop and reflect. Do the figures you arrive at surprise you? Was it a particularly expensive or inexpensive three months? Were there particular one-off purchases you do not expect to happen again? By thinking hard and being honest with yourself you should hopefully have arrived at a minimum and aspirational income figure for retirement.

An often quoted figure when estimating the capital required for income is to multiply it by 25.  This assumes that taking 4% from investments is sustainable over the longer term, net of costs.  While not a perfect calculation, it can be useful to obtain a general figure required.  Taking the examples above, you would have the following:

Category Income Required Capital Required
Essential £12,000 £300,000
Basic £22,000 £550,000
Luxury £36,000 £900,000
Aspirational £150,000 £3,750,000


Armed with these figures, you now have a goal to aim for when saving; however there are some pretty big caveats:

  1. These numbers are in today’s terms, if you were to retire immediately, and over time inflation will increase the costs for your needs. If, for example, inflation averaged at 3%, in five years the £900,000 requirement would be £1,043,347.
  2. This is an estimate only, and based upon your current lifestyle. Should you require nursing care, for example, your lifestyle costs may increase significantly.

The next step is to assess the feasibility of meeting this income, and take measures to get you on the right track to achieving it.  As a part of our Wealth Management service, we look at your circumstances and timescale, and identify the opportunities available to accumulate and manage wealth effectively.  These areas may include:

  • Maximising pension contributions, and utilising allowances, to increase your retirement savings, and increase the tax efficiency of your arrangements;
  • Providing recommendations for your existing investments, and providing ongoing management to ensure they continue to suit your objectives;
  • Carrying out cash flow modelling exercises, to not only refine the estimated requirements, but also to test multiple scenarios, such as different ages of retirement, or needing nursing care.

Working together with you we will help you to develop and achieve your aims for retirement.  We will review your arrangements regularly to ensure you remain in the most suitable position, and make you aware of the opportunities available to boost your chances of living the life that you want.



Thatcher’s gift

Often written about and commented upon by the media is the subject of Inheritance Tax and increasingly there is a feeling that the true implications of this tax are misunderstood.

We have a tax which is levied at 40% on everything you leave behind in excess of the standard nil rate band currently £325,000. Yet there is no need to pay the tax if you plan properly.

It would be fair to say Inheritance Tax could be viewed as an aspirational tax as it seems that there are many who presently care little about this tax, as they don’t believe the tax applies to them. Whether or not they aspire to build an estate with real value or not it seems more and more of us are rapidly falling within the grasp of this iniquitous tax. The time for action is now and not to wait until it is too late to undertake any meaningful planning.

So whilst some of us sob into our gin and tonics about the real possibility of having to pay Inheritance Tax on our modest estates, it would be fair to say HMRC are rubbing their hands with glee. They have recently reported record receipts for Inheritance Tax. In 2014/2015 the tax take for this tax was £3.8 billion and in 2015/2016 this had increased significantly to £4.8 billion this is an increase of an eye watering 22%.  Pretty cool numbers for what is seen as a tax only the rich need to be concerned about.

The question is whether this is really a tax that affects only the wealthy or does its grasp reach further? The Office for Budget Responsibility forecast that over 450,000 families will in 2016/17 have to face the prospect of paying tax on their inheritances. (Interestingly records from the Office of National Statistics show that 525,000 people died in England and Wales in 2016). These numbers suggest we all have to address the possibility we may be subject to Inheritance Tax.

Planning your financial affairs can be easy or complicated the choice is yours. We have over the years witnessed some very sophisticated tax planning arrangements designed to reduce Inheritance Tax.

One of the latest cases was M L Salinger and J L Kirby v HMRC (2016). They appealed against HMRC’s determination that Inheritance Tax was due on the estate. The appeal was upheld. The arrangement involved the transfer of a reversionary interest into an offshore trust. The taxpayer’s standpoint was that the reversionary interest had no transfer value as no consideration was given. The First Tier Tribunal had to decide upon two questions and as noted their considered decisions on these two questions favoured the taxpayer over HMRC.

This is all very interesting and hopefully good news for the beneficiaries. But they had to fight against the initial verdict and then launch an appeal all of which will have delayed distributions from the estate. Defending cases such as this one is not without cost or uneasiness for the eventual beneficiaries, and HMRC rarely lose cases.

The good news is this tax, which in truth penalises the sensible savers can be reduced or even negated without the need to create complex tax shelters such  as the one described. It is probably good advice not to invite scrutiny by HMRC

The simplest way to avoid Inheritance Tax is to make sure your estate is worth less than the nil rate band which is £325,000 or £650,000 if there is an unused spouse or civil partner allowance you can use. If you are an unmarried couple you still have your separate nil rate bands but this cannot be combined upon death.

Other opportunities are:

  • The new residential nil rate band which has the potential to remove £1 million nil rate band by the year 2021 However, even with this new Inheritance Tax break the actual numbers who will eventually benefit from this tax break are limited.
  1. The new allowance is reduced by £1 for every £2 by which the estate is in excess of £2million.
  2. The clue is in the name, you have to have owned a property that was at one time your home. If you don’t own a property you cannot benefit
  3. It only applies to property left to direct descendants. So to a couple who are not married and not being direct lineal descendants they therefore do not qualify for the residential tax break.
  4. If the property is worth less than £175,000 (or £350,000 for a couple) the nil rate residential allowance has a limited advantage.
  •  You can make a gift of any size now and as long as you survive a period in excess of seven years the gift is deemed to no longer be within your estate. But should you die within the seven years the gift falls back into your estate. Nevertheless gifts between spouses, civil partners and charities are always treated as being tax free.
  • You have an annual allowance of £3,000 each tax year which you can gift. There is also a marriage allowance of up to £5,000
  • You can make gifts out of income as long as these gifts are regular in nature and do not impoverish the person making the payments.
  • You can place a life insurance policy to cover  your potential Inheritance Tax liability into trust and use this to pay the liability
  • Equity release can be used to avoid Inheritance Tax.  However this is an option you should treat with great care.
  • Business Property relief and Agricultural property relief is available and also has the potential to reduce an estates exposure to Inheritance Tax
  • Having a properly written Will is a must although is does not in itself reduce the liability to Inheritance Tax. There is the possibility with careful planning and good legal advice to pass the Inheritance Tax allowances down the generations.
  • When you take out a Lasting Power of Attorney for Property and Financial Affairs you should ensure your Attorney(s) has the powers needed to continue any gifting you normally would have made.

The earlier one plans the more effective it can be and yes this is a tax which is more and more likely to affect all of us.

For more information about our services, simply complete our enquiry form, send us an email or call our Cambridge office on 01223 720208 or our Norwich office on 01603 692732.

The following subsidiary of the NW Brown Group is authorised and regulated by the Financial Conduct Authority to provide regulated services: NW Brown & Company Limited (191123).

Stocks in Focus: Next

This week I am writing about Next, the fashion retailer that provided a disappointing trading update last week. Next is often regarded as a bellwether for fashion retailers, many of which will provide their own trading updates later this week. Next had hoped to improve on the poor sales it had in the run up to Christmas 2015, which were hampered by understocking of popular items. However, it announced a modest fall in sales for the equivalent Christmas trading period in 2016 and a fall of 7% in the post-Christmas sales promotion period.

As with the rest of the retail sector, Next has had to contend with unusual weather patterns that have made stocking relevant seasonal items challenging. The British consumer is also moving away from spending on fashion, with data indicating people are spending more on leisure and experience activities than high street retail.

Looking forward, management guided towards ‘an even tougher sales environment for the retailers’ in 2017 and suggested a further fall in profits of between 2% and 14% for the year. Uncertainty over rising inflation eroding earnings growth and putting a squeeze on consumer spending were cited as challenges the company faces in the coming year. In an attempt to reassure investors, the group have adjusted its return of surplus cash to four quarterly dividends of equalling amounts.

The consideration for investors is now to assess whether Next is suffering from self-inflicted, company specific issues, or whether their figures are indicative of the wider fashion retailer landscape. It will be interesting to see whether other retailers’ announcements over the coming days shed any further light on this as we move into a very uncertain year for the UK retail sector.


Points of View: UK interest rates

Another week on and we continue to face more surprises following the UK’s vote to leave the European Union. Last Thursday the Bank of England (BoE) decided to keep interest rates on hold at 0.5%, despite strong expectations of a 0.25% cut.

No one knows the precise impact that Brexit will have on the UK economy, but the BoE has highlighted that business and consumer confidence has fallen significantly both before and since the vote. Specifically, data suggests that many businesses have frozen investment decisions and the fear is that this will lead to an economic slowdown and possibly a recession.

The rationale for an immediate cut in interest rates is that this would in theory mitigate any slowdown by encouraging spending and investment. So why has the BoE decided against such action? Essentially, it is on the basis that that the loss of confidence could prove temporary as the Brexit shock recedes. Nevertheless, the BoE has stated that it will do everything within its power to reduce the downside risks facing the UK and, unless there is some evidence that confidence is rebounding, a 0.25% interest cut seems likely in the coming months.

It remains difficult to predict how the economy will be affected by the Brexit vote, but unless rising inflation becomes a greater concern, the BoE looks set to keep interest rates “lower for longer” in the face of uncertainty. From an investment perspective, we would again highlight the importance of creating robust, diversified portfolios that are not overly sensitive to any one scenario in an uncertain environment.


Points of View: The Impact of Brexit

The UK has voted to leave the EU, surprising many in global markets who had expected a narrow win for the “Remain” camp. In the short term this has triggered a fall in the pound and weakness in global markets as investors digest the political and economic ramifications of this momentous decision.

The market was not expecting a Leave vote and so we are now in a state of flux and heightened volatility. Thus far the biggest moves have been seen in the currency markets with the pound falling significantly against both the dollar and euro. In contrast, UK equities have initially been quite resilient compared to other global equity markets – not least because the large, international companies that dominate our market derive a large proportion (c75%) of their earnings from abroad, and a weak currency means that these overseas earnings will now translate into markedly higher sterling earnings. Having said this, certain sectors and businesses have of course been more volatile than others. Within the UK market the biggest fallers have been the housebuilders, property companies, retailers and financial services companies with domestically-focused businesses.

In the UK gilt market, long-term government bond yields have thus far edged downwards (meaning prices have edged up). So long as the question marks about sterling do not turn into questions about the creditworthiness of the UK government, the prospect of an interest rate cut and further quantitative easing from a supportive Bank of England may now keep bond yields “lower for longer”.

Overall, we expect volatility to continue for some time until the political and economic implications are better understood.  At NW Brown we are confident that our portfolios are well placed for surviving and prospering post Brexit – something we expand in a fuller commentary that can be found on our website at http://www.nwbrown.co.uk/document/June2016MarketReview.pdf

Points of View: Inflation

Consumer prices in the United Kingdom increased 0.3 percent year-on-year in May. At this low level, and after years of falling headline numbers, investors may be forgiven for not giving this too much thought. However, despite the historically low inflationary environment, the longer term effects and the power of compounding cannot be ignored – the value of £100 ten years ago, for example, is worth less than £80 today.

Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn’t, pays it.” Inflation can be seen as a compound interest which we are all forced to ‘pay’, and by understanding it we should seek to find assets which consistently protect against it in the long term.

Equities, property, inflation-linked bonds and commodities are often championed as hedges against inflation, but none of these are perfect; property is illiquid and vulnerable to prolonged periods of depressed values; inflation-linked bond prices are influenced by inflation expectations, which are only loosely correlated with changes in actual inflation; and commodities can be volatile and do not provide an income. Equities are also volatile in the short term but are arguably the most reliable source of real returns over the long-term, not least because the underlying companies buy and sell products at prevailing market prices. In any five year holding period over the last 30 years, for example, UK equities produced a real (above inflation) return 80% of the time.

It is this relatively reliable ability to generate attractive real returns over time that leads us to build long term portfolios around a dominant core of equity exposure.


Lifetime ISAs

In the March 2016 Budget we saw first details of the new Lifetime ISA (LISA).  Due to be introduced in April 2017, it is designed as a way for those aged 18-40 to save for both retirement and their first house.  It is understood that the LISA will have an annual contribution limit of £4,000, which will be topped up by the government by a further £1,000.  If you take out the LISA by age 40, you can continue to invest in it until age 60, however, only contributions made up to age 50 will qualify for the 25% government bonus.  The accumulated pot can then be used towards purchasing your first property, or held until age 60, at which time the money can be taken out tax-free.  Be careful though, as if you withdraw the money at any other time, you will lose your government bonus and pay an additional 5% penalty.

It is intended that this will ultimately replace the Help to Buy ISA, but with similar tax relief and a greater contribution limit, this shouldn’t cause too much upset.  If you already have a Help to Buy ISA, this can continue in addition to a LISA, but you will only be able to use the bonus from one of them towards a house purchase.  Alternatively, your Help to Buy ISA can be transferred into a LISA. Whichever ISAs you hold, the overall ISA allowance will be restricted to £20,000 from April 2017.  Just like other ISAs there will be the option to invest into cash or stocks and shares.

It is suggested that the introduction of the LISA is the first step on the path to turning the pension system on its head, but there are already questions being raised as to whether young people will continue in their auto-enrolment pensions, with the availability of the LISA.