Retire Invest Spring 2021

PENSIONS Printed on paper produced using wood fibre and manufactured at a mill that has been awarded the ISO14001 and EMAS certificates for environmental management. Image Credit Image Credit The main state pensions will have risen faster than inflation by April 2021, but these state benefits are still low compared with even average earnings. The new state pension (for those who qualify and reached state pension age (SPA) after 5 April 2016) will rise to £179.60 a week in April 2021 and the old (basic) state pension (for those who reached SPA earlier) will be £137.60 a week. Both increases are 2.5%, a rate secured by the so-called ‘Triple Lock’, which requires these pensions to rise by the greater of: ■ ■ the increase in average earnings; ■ ■ the rise in prices (as measured by the consumer price index (CPI)); and ■ ■ 2.5%. The new state pension and National Living Wage (NLW) both came into effect in 2016, but 2021 is the first year that the pension is the faster growing of the two. Compare the positions of Jack, aged 64 and Jill, aged 66. In 2021/22, Jack works a 35-hour week for the National Living Wage of £311.85. Jill, at the new SPA of 66, will receive the new state pension of £179.60 a week – less than 60% of Jack’s earnings. The UK sits at the bottom of the state pension league table for OECD members. This lowly position explains why the government has placed so much emphasis on automatic enrolment in workplace pensions. Similarly, it demonstrates the need for additional private pension provision regardless of any increase to the state pension. B Investing in shares should be regarded as a long- term investment and should fit with your overall attitude to risk and financial circumstances. A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investment and the income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Premium Bonds prize rate falls The prize rate for Premium Bonds has reduced from 1.4% to 1% as savings rates hit a record low. Each £1 bond has just a 34,500-to-1 chance of winning a prize, which may be as low as £25. However, while most bondholders won’t win anything, two lucky winners do scoop up £1m each month. Rent falls hit buy-to-let The Covid-19 pandemic brings more bad news for buy-to-let landlords. Rents have fallen in many major cities, because of lower demand for rented accommodation from students, overseas workers, tourists and business travellers. The drop is most pronounced in London, according to Zoopla, but rental prices are also falling in Manchester, Birmingham, Edinburgh, Leeds and Reading. Regulation of postponed payment services Financial regulators will now oversee the `buy now pay later' firms offering interest-free loans to online shoppers. These services allow people to pay for items in instalments and were used by five million people in the last year. There are concerns these interest-free services are an easy way for people to fall into debt, particularly the younger generation. Providers, such as Klarna, will now have to undertake affordability checks. News round up NEWS IN BRIEF What is £1 million really worth? Millions, billions and even trillions now make the headlines, but what do all those zeros really mean, and what will they buy? You may think you know your billion from your trillion, but it’s not quite so simple. ■ ■ One billion is now 1,000 million – 1,000,000,000. Pre-1974, in the UK it was one million million. ■ ■ One trillion is normally now taken to be 1,000 billion – 1,000,000,000,000. One million is no longer as impressive a figure as it used to be. For example: ■ ■ At age 65, £1 million will currently fund an inflation proofed pension of around £2,400 a month before tax. ■ ■ Placed on deposit at the Bank of England base rate (0.1%), the interest produced by £1 million would only be £1,000 a year. ■ ■ Invested in the UK stock market, £1 million would generate annual dividends of £33,500, based on the current market yield. Billions are what the government is spending – and borrowing. In 2020/21, the government is expected to have borrowed around £400 billion, equal to around £6,000 per head of population. That will take some repaying: adding 1p to all income tax rates would only raise just under £7 billion a year. Trillions are rare in a UK context, but currently £2.1 trillion is a key figure: it is roughly both the size of the UK economy and the total of government debt. So, what do all the zeros tell you? Firstly, retiring comfortably probably costs much more than you thought. Secondly, you should look to your own financial planning to cut your tax bill, as the government cannot afford to do so. B The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long- term investment and should fit in with your overall attitude to risk and financial circumstances. Credit: Alexander Raths/Shuttersetock.com PLANNING State pension rise still locked Credit: Ivan Kruk/Shutterstock.com