Monthly Newsletter – July 2023

2 July 2023

How can we strategise for an extended lifespan? We examine our perceptions of potential premature mortality, which can strongly impact our savings.






Pensions Savings and Longevity

There are many questions that people need to ask themselves when planning for their retirement. Firstly, how much income and capital will you require? Will this requirement increase or decrease over time? Perhaps the biggest unknown, however, is how long you will live for and therefore how big a fund you will need to service your income and capital requirements.New research from Canada Life has shown that men and women aged 50 and over think they will live until around age 80. However, figures from the Office for National Statistics suggest a male aged 50 will live on average to age 84, while a woman aged 50 will live on average to age 87. These recent increases in longevity are only expected to increase further in the future. Please see the graph below for an illustration of this:

This, therefore, shows that there will be many people with shortfalls in retirement which will put them in a difficult situation. It is important to monitor your retirement goals on a regular basis and to plan for funds lasting to beyond average life expectancy. This should ensure that you have peace of mind in retirement, and you don’t have to worry about what you will do if funds run out.

Cash flow planning is a very useful way of seeing how long your funds are likely to last based on your income needs. This can show where more funds need to be saved to meet your goals and objectives. It is also good to look at various scenarios showing different levels of returns and can be stress tested to cover unexpected shocks.

If you are unsure if you are saving enough to meet your retirement goals, please speak to the office and we can help you with advice on additional contributions and cash flow planning to ensure that you have the retirement that you deserve.
Darren Fuller – Senior Paraplanner

Consistent companies vs crazy current accounts
Interest rates are up so more people are asking if they should move to cash, as the big appeal is that cash feels reliable. But that is only true in the short term. Over decades the interest rate paid on cash is in fact very volatile, spun around all over the place by the Bank of England.  Cash interest rates have swung from 0.1% to well above 14% over time.
The chart below shows that the dividend yield on UK equities is far more stable than cash. Apart from 11.7% in 1973, the lowest equity dividend yield was 2.0% and the highest was 6.9%.
Looking at the incentives behind those yields, it makes sense.
The central bank raising rates is an unpopular move and cutting rates is a regular occurrence. Whereas with a big public company the dividend shows how reliable and profitable they are, so they are desperate to be stable. Nothing is given up for that dividend stability, the 123-year average of cash rates and dividend yields is identical at 4.5%.
Plus, with cash the yield is the whole return, its all you get. So, the 123-year annualised return is the same as the average interest rate,4.5%. But with equity the return isn’t just the dividend yield, there is also the possibility of growth in the capital. So, the 124-year annualised return for UK equities is 8.8%, about half from dividends and half from growth.The tables below illustrate that this adds up over time: 
Source: 7IM
Charitable Donations

The Charitable Aid Foundation’s UK Giving Report 2022 has highlighted the impact the global pandemic and the pressures of the cost-of-living crisis in the UK have had on UK households being able to give to those in need.

The research shows a fall in the overall amount people in the UK gave to charity from £11.3 billion in 2020 to £10.7 billion in 2021, and that one in eight people were thinking about cutting back on donations because of the cost-of-living crisis. Despite this, the findings also show that most people engage in charitable and civic activities – with over 86% of those aged 55 or older doing so.

Pensions are often one of a person’s largest assets, so it’s perhaps no surprise that from time-to-time clients want to explore whether they can put their pension fund to work helping charitable causes. Unfortunately pension legislation only permits certain authorised payments to be made from pensions. The options are limited as donations may not be made directly, but two are worth considering.

Payroll giving

Pension income is taxed via PAYE so payroll giving is available when income is being drawn, just as it is when someone receives their salary or wages. As the donation must be made from income, the member will have to crystallise some (or all) of their pension first. So this option is normally only available to those who have reached the normal minimum pension age, currently 55. Any income paid through flexi-access drawdown will trigger the MPAA (money purchase annual allowance) even when payroll giving is used. The members future ability to build up their pension savings will therefore be limited, although there was an increase in the MPAA from 6 April 2023 to £10,000 so this makes it less punishing. But it is important to balance lifetime gifting and security in retirement.

The donation is made by making a deduction before tax and then paying this to a Payroll Giving Agency which in turn pays the funds to the member’s chosen charity. Some agencies may charge an administration fee which would need to be paid by the scheme or deducted from the donation, and there is additional administration work required of the scheme administrator to set up these payments. Bespoke SIPP operators are therefore most likely to provide this service.

Gifting after death
The second option for gifting to charity from a pension is by donating from pension death benefits. If the member nominates a charity in their expression of wishes and has no dependants, the lump sum will qualify as a charity lump sum death benefit. This means the funds won’t be tested against their lifetime allowance, and the lump sum will be free of tax regardless of the member’s age when they died. It can also be paid from a beneficiary’s drawdown pension.  The charity lump sum death benefits can also only be paid from money purchase schemes, and the term ‘dependants’ includes spouses, civil partners, and the member’s children under the age of 23. This, therefore, is not an option for everyone.
Even if the conditions for a charity lump sum death benefit aren’t met, it is still possible for a lump sum to be paid to charity from pension death benefits. But it may be subject to tax. In this case no Income Tax is due if the member was under 75, as log as the payment is made within two years of the scheme being made aware of the member’s death. If they are over 75 a special lump sum death benefit charge of 45% will be deducted from the lump sum. This seems like a significant sum, but if other potential recipients e.g. non-dependant family members not included in the expression of wishes, are higher rate taxpayers, the amount of tax to pay would likely be similar.
Source Bethany Joslyn: Professional Advisor

Quiz Time

How many countries are there in the world?

Well, the answer isn’t obvious…

FIFA has 211 member associations. There are 206 National Olympic committees. The UN has 193 member states and two non-members (Vatican City and Palestine) but doesn’t recognise Taiwan or Kosovo. And there are a few other disputed areas/nations too. So shall we agree on “around 200”?

How many of those 200-ish countries are in the MSCI (Morgan Stanley Capital International) All Country World Index?

Trick question. You know it won’t be all of them. There are probably a few easy ones to exclude like Russia and North Korea.

But this is the ALL-COUNTRY WORLD INDEX so you would think it was most of them.
It’s 47!!. Less than one quarter!  Not ALL! Also the FTSE All-World Index also underwhelms with 49 names – Romania and Iceland sneaking in).

There are some good reasons to do with how ‘investable’ a market is – some countries just don’t have a stock exchange, or it isn’t accessible to outside investors, or it’s too small.

But ultimately it means that the World index everyone looks at isn’t really like the world at all.

Another way to see this difference is to think about Developed Markets (23 by MSCI’s count) vs. Emerging Markets (24).

The chart below shows the share of global GDP each of these categories takes up.

In 2011, Emerging Markets became bigger than Developed Markets for the first time.

And today, Emerging Markets represent 47% of world GDP, while Developed Markets are just 38%.

And yet, Emerging Markets are just 11% of the MSCI ACWI! And another 150 countries are 0%!

Interesting Financial Fact:
The Nazis tried to flood the UK with counterfeit notes during the Second World War
In an effort to devalue British currency and destabilise the economy, Nazi Germany produced huge quantities of counterfeit sterling notes during the Second World War. By 1945, a staggering 12% of the value of notes in existence were forgeries. They tackled the problem by removing higher denomination notes from circulation, and putting metal threads through new notes, to make them harder to forge. Churchill himself would surely have approved of his image adorning the new polymer fivers, which are designed to be the hardest to copy yet.
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