1

YourGuideto aHappyRetirement

Securing Your Future Financial FreedomUpdated January 2016

2

Th e Lowland Guide to a Happy Retirementby Graeme Mitchell, Managing Director

In my long experience of talking to people regarding their future plans, there seem to be two diametrically opposed ways of approaching retirement – with an almost infi nite variety of permutations in between.

1. THE SAVER – savers set money aside for the future oft en to the detriment of other things. Th ey seldom buy new cars, are hardly ever in debt (mortgage but no credit cards) and only pay for things they can aff ord. However, engrained savings habits are diffi cult to stop, so at the very time they can relax and spend what has been set aside for the future – they invariably fi nd it hard to stop saving, and continue to accumulate money.

2. THE SPENDTHRIFT – oft en higher rate taxpayers with an aspirational lifestyle. Big house (generally with correspondingly big mortgage), they use credit cards, drive top of the range cars and have an expensive taste in clothes, entertainment, holidays etc. Minimal savings accumulate because every penny is spent maintaining lifestyle!

However, the spendthrift is hoping to be ok when they retire because much of the high expenditure (mortgage, entertainment, children) will stop or reduce substantially. And they “can always downsize”.

Whatever your approach towards money management, I think you will fi nd the following guidelines very helpful working towards your fi nancial freedom which means your retirement is one of comfort, fun and enjoyment rather than a time of worry, stress and regret.

3

Good newsI want to start with a positive message – despite the doom and gloom in the press I seldom find anyone who will be in dire straits when they retire. It is likely that you will have a plan of sorts which broadly reflects your circumstances, so when we look at things in detail I suspect you will be well on the way to achieving your retirement objectives. Virtually any plan can be improved upon. Occasionally I find a way to make a huge difference to an individual , but more often than not my job is to identify a series of marginal gains which together add up to worthwhile improvements. However the reality is that most of what we do is to reassure and help you understand what you have and to advise on how to make the most of the opportunities available, be it reducing costs, selecting appropriate funds or saving tax etc.

Here are some ideas to help you on the way. Our job is to advise you on how to get more from your money. I hope you will be reassured that our opinions are also sought by journalists who recognise our expertise in the area of retirement planning and pensions.

4

Where do I start?

Let’s assume that you are interested in planning for your retirement rather than just waiting for it to happen to you, because you are reading this guide. As with most tough decisions in life, planning how to make the most of your retirement is never easy. You will be bombarded with adverts and articles every day in the press. Internet searches can prompt as many questions as they answer! But it’s never too late, so the sooner you know what your plan looks like the better. It may seem obvious, but the essential parts of a retirement plan are:• How much money you will need to maintain your lifestyle• What assets etc you have available to pay out what you need

How much money will I need?

A good place to start is to think about what you are likely to need, to allow you to live life to the full when you retire. It is likely you’ll need less every month because rather than accumulating funds towards your retirement, when you retire you will (hopefully) have paid off your mortgage, you probably won’t be saving, and with any luck you will have managed to persuade the family that you are no longer their bankers.

Make a note of your net income from all sources – work, dividends, rent, interest – in theory that is what you are spending now, so it’s as good a place to start as any. Then deduct the things you probably won’t need to pay for every month when you retire: Mortgage payments (assuming they stop by the time you plan to retire) Pension contributions Regular savings Life Insurance Financial support for family Running costs of car/s to and from work The figure left over is what you would need to maintain your current standard of living. That should make you feel a bit better already – it is generally much less!

List all your net income Deduct the things you probably won’t needWork £ Mortgage payments £Dividends £ Pension contributions £Rent £ Regular savings £

Interest etc £ Life Insurance £

Pensions £ Financial support for family £

Other £ Car costs to and from work £Total £ Total £The difference between these two totals is what you would need to maintain your current standard of living when you retire. That should make you feel a bit better already – it is generally much less!

5

If you are Self Employed you may not be feeling quite so comfortable after this exercise because some expenses (vehicle, utility bills, mobile etc) may be paid by the business, meaning you could have some additional costs when you retire. However hopefully you will have more scope to plan ahead as a result of being your own boss.

Do I really need to spend as much?A significant part of retirement planning is making sure you have enough money to cover expenses. This section is a more detailed assessment of the net income you need; a chance to look at things in more detail. Here you can consider what is vital and what may need to be adjusted now or later on. For example will you still need 2 cars when you retire, will you still be travelling to exotic places in your 80’s? Have a good look at the detail – it is possible that you might be able to make some adjustments or at least have an idea of the things which you could do without longer-term if there is not enough to afford them indefinitely. List what you think you might need in three categories:

Basics – essential expenditure below which you could not possibly exist Council Tax Utility bills Food & drink Clothes Car expenses Obligatory Insurance

Lifestyle – things that make your life enjoyable – not just getting by Entertainment Holidays – UK or Europe Hobbies/sport Upgrading cars Luxury – passions which may not always be possible, practical or affordable Long haul travel More expensive interests such as horses, boats etc. Helping family e.g. grandchildren

These are just examples to help you think about what you need when you retire and the relative importance to you now and in the future.

6

Calculating expenditure – a shortcutWhilst everyone has different costs to reflect different lifestyles, if you are finding this expenses calculation a difficult exercise because there is no pattern to your expenditure, or you are just too busy – try this shortcut. Work out the basic costs – ie what you cannot manage without (a quick check of recent bank statements will help) - and then double it! Let’s say you have identified the following monthly costs:

Council Tax £160 Insurance £80 Utility bills £160 Food & drink £220 Clothes £80 Car expenses £140 Miscellaneous £160 Total £1,000 Then Double it* £1,000 Total £2,000 *WHY? Call it an allowance better Lifestyle of £500, and for Luxury at £500pm. My experience would suggest that at two times your basic expenses you will not be far off what you need to have a well-funded and stress-free retirement, where you don’t need to worry about financial issues.

How will I pay for everything?We have looked at what you think you might need to spend when you retire. Now it’s time to list your assets, i.e. the potential sources of future income and lump sums (to check to see if there is enough to cover these expenses): • Cash/savings (including bank accounts, Cash ISAs, National savings etc)• Investments (investment ISAs, Investment Bonds, Shares, Unit Trusts)• Pensions (personal, employer state etc)• Property (equity in your home if you downsize, rented property etc) • Family trusts (if you are entitled to income)• Inheritances (a delicate subject but potentially part of longer term plans) There will always be choices.

7

For example there are many ways to take income from your pension as well as different funds to choose from . If you use the income from pensions (which is taxed) and income from an ISA (tax free) you can optimise tax and as a result improve what is left for you and your family in the future. Whilst you are working you still have the potential to keep adding to your savings and investments for the future. The big culture shock when you retire is that you’re unlikely to be in a position to save any more, and you have to rely on the same assets to generate money to pay the bills for the rest of your life. However at the point when you retire you can probably afford to take the view that if your money reduces in value, then (provided it never runs out) that may be perfectlyacceptable to ensure you have the money required when you need it.

It’s never too late...However close you are to retiring I maintain you can always do something to improve matters. For example, assume you are three years from retiring and you have done the calculation of your income and find you’re likely to have less than you need. You could bury your head in the sand and hope you win the lottery, or you could take some steps to see what living on a reduced income might be like. If your income on retirement looks like being £500pm less than you earn now, consider saving regularly now – say £250 into a cash ISA every month. The money is still available to at you any time if you really need it, but if you can manage to avoid touching it you have proved you can manage on a reduced income – more in line with what you may have after you retire – and there will be over £9,000 in the bank by that time. It might be that you need to carry on working and defer the retirement for a few years. This may not be a palatable option but in some instances it could be the only viable choice. We are all living longer so another few years working whilst you build up additional savings (or wait for the state pension) could be worthwhile.

Do you have a problem in life?

Yes. No.

Can you do anything about it?

Yes No

Then don’t worry…

8

It’s not all about the money money money!Not surprisingly much of this guide is about the financial aspects of retirement. But there are other important factors such as how you plan to fill the time you spent previously at work. Work can often be a place where we feel important – retirement (I am told) can leave you feeling deflated or of course it can be a blessed relief! Have you thought about how your retirement will impact on other people? My father retired two years earlier than my mother. I remember him telling me he had established his routine which my mother “disrupted” when she retired! How will you change your lifestyle in retirement, not just from a monetary perspective – what will your day-to-day life feel like? • What would an ideal week in retirement look like? • What will an ideal week in retirement look like for your spouse? • Are those weeks compatible?

It is worth devoting time to planning the retirement lifestyle now, not once you retire. Get active and take up new (or revisit old) hobbies and interests well before you retire, so that when the day finally arrives, you already have a raft of activities and relationships to enjoy and develop further. It may be that sports bodies (such as Golf, Rugby, Curling clubs) as well as charities are looking for help. Increasingly families might be grateful for some extra child minding help! Whilst these are generally unpaid, they can give tremendous satisfaction because you choose to do them – which may or may not be the case with your work.

8

9

Equalise (and maximise) your income Every UK taxpayer has a potential personal allowance which means you can earn money every year without paying tax. From April 2016 the personal allowance is £11,000 per person. If you are married, try to make sure that where possible both partners use this allowance. If all the income is skewed towards one person there may be scope to switch some of the Personal Allowance to your spouse. If your spouse or partner earns £7,500 next year, they effectively have £3,500 of their allowance that they are not using. Of this, they can transfer the full £1,100 (10% of the nil tax band). This increases your tax-free allowance to £12,100, and the 20% saving on that extra bit is equal to £220.

State pensionThere have been some huge changes in the way the state pension is calculated. From 6th April 2016 there is supposed to be a flat rate of at least £155.65pw (£8,093.80pa) for those with a full National Insurance record - however this does not apply to everyone, e.g. anyone who has ever “contracted out”.

It’s quite a complicated calculation and really needs to be obtained directly from the Government. I strongly recommend you get a forecast of what you might be entitled to. It’s a significant amount, and for a couple it’s potential income of £1,348.96pm tax free.

You can Google State Pension and look at the Gov.uk site, or there is some good information on the ageuk.org.uk site. However the best option is to either apply online or complete a form BR19 to get a forecast so you know how much you are likely to get. So much better than guessing!!

Balancing your retirement income as a couple means you escape thoseInland Revenue predators and enjoya great outlook!

10

I would prefer not to gift my hard-earned wealth to the government

You have worked hard, saved and invested for your retirement ensuring you pay as little tax as you can along the way (whilst remaining within the law). Waiting in the wings is a potentially significant tax bill – in effect because you have accumulated more wealth than the government believes you should be allowed to pass on in full to your heirs.

Inheritance Tax (IHT) is charged at 40% on total assets in excess of £325,000 per person. Allowances are transferrable between spouses so, for the time being, a couple can leave £650,000 before IHT is due. This figure of £650,000 is fixed till April 2020 - but there is to be a new “family home allowance” of up to £175,000 per person - so assets up to £1m could be exempt from IHT if you die after April 2020!! Meanwhile - add up all your assets and see if you have over £325,000 per person. Couple IndividualCombined House, Contents,Vehicles etc. £410,000 Allowance (not taxable) £650,000 £325,000Savings £60,000 Estate taxable £120,000 £445,000Investments £300,000 Tax due at 40% £48,000 £178,000Total £770,000 However please remember that IHT is not your problem. The Tax is only payable when you die! Once you have taken care of number one and your future income is secure – then and only then – can you consider the options.

11

Reducing Inheritance Tax impact

Once you have ensured you will be financially secure (this may be a few years after you retire to be on the safe side) if you can afford to give money away to family, this can help reduce the impact of Inheritance Tax in future.

Some examples include:

• Up to £3,000 per giver per tax year is exempt as are payments of up to £250 to as many recipients as you like.

• You can gift more every year under the less well-known Ordinary Income Exemption which if justified can also be excluded from future calculations.

• Larger lump sum payments or gifts of assets are generally exempt if seven years pass between the date of the gift, and the death of the giver.

Remember to keep a record of sums and exact dates any payments or gifts are made to prove that they are exempt in future. The Direct.gov.uk website has much more detail on the exemptions just search under “Inheritance Tax”: https://www.gov.uk/inheritance-tax/gifts

Insurance to cover IHT liability

If you prefer not to give money away, Life Insurance is worth considering. Your next of kin receive a tax free lump sum to pay off the anticipated Inheritance Tax liability. You keep all your assets for your benefit during your lifetime but agree to pay a monthly payment to a life insurance policy which pays out when you both die.

Case: Janet 68 & John 73 (names changed)We had a meeting with their solicitor to discuss wills, power of attorney and Inheritance Tax planning. We added up all their assets and identified a potential Inheritance Tax bill of £80,000 on second death. For just £150 per month they were able to get £80,000 cover where premiums are guaranteed not to change. John would need to be 126 years old before the family get back less than he paid into the policy with £80,000 guaranteed to be paid out.

12

Some further Inheritance observations Cohabiting without formal partnership

Married and civil partnership couples benefit from 2 x the allowance which means that IHT is only payable on assets over £650,000. If you’re cohabiting with no formal arrangements anything left to your partner over £325,000 is potentially taxable. Not the most romantic reason to get married, but worth being aware of!

Farmers

I have had many conversations about “who gets what” and “is this fair to everyone”. Typically with farming families one child will be working on the farm whilst siblings move away and make their own way in life. For most clients it would generally be reasonable to assume all assets should be shared equally between children. However in doing so with a farm (or a family business) a valuable asset could be irreparably damaged or sold to pay out an inheritance – that is not fair either.

Joined-up thinking

These issues need to be carefully considered in conjunction with all your trusted advisers. Accountants, Solicitors and Financial Advisers will all have seen these situations many times and can offer specialist guidance based on practical experience advising other clients in the same situation.

Pensions

Death benefits for any remaining pension fund value when you died is not included in any calculation for Inheritance Tax (IHT).

As a result pensions have become a good device to minimise potential IHT.

And it’s getting better...

By April 2020 a couple with a property worth £350,000 or more will have in effect £1 million of assets exempt from IHT - plus the value of any pension.

12

13

Bargain hunt for the best buy in annuities

When you save money in a pension you are building up a fund to provide an income (pension) when you choose to retire. You are generally allowed to withdraw 25% as a tax free lump sum leaving 75% to provide income:

Pension fund £133,333 Tax Free Cash £33,333 Balance £100,000 (to generate income)

Despite the recent changes to pension options, the most common form of income is an annuity. In the example above the fund (after deducting 25% tax free cash) is still £100,000. When you buy an annuity the £100,000 is replaced with a guaranteed income for the rest of your life. Don’t take the first annuity on offer from your pension company. They are supposed to make it easy and obvious that you can shop around so see if you can do better under the “open market option”. You are under no obligation to buy your pension with the company you originally invested with. We have helped hundreds of clients benefit from improved pensions by shopping around. Very occasionally sticking with the existing company can be beneficial, especially if you have an older policy (generally pre 1987 and typically invested in a With Profit fund).

Case: A Recent ExampleFund £37,430Tax Free Cash £9,357Net fund to buy annuity £28,073Annuity Option Payment Available Extra Pension p/aExisting Pension Company £1,239 n/aOpen Market Conventional £1,335 £96Open Market Enhanced £1,642 £403 In this case the client was around 8% better off as a result of shopping around under the conventional Open Market options and 32% better off (£400 every year) because he qualified for an enhanced annuity. Figures are rounded off.

14

Pension options

When you retire you will be faced with one of the most significant (and in many cases irrevocable) decisions you will ever face. In his March 2014 Budget George Osborne introduced a new era of Pension Freedom which included unlimited withdrawals from Income Drawdown with huge improvements to the income and death benefit options for annuities and Income Drawdown in the meantime. You could make any one of these choices:

Tax free lump sum Typically 25% of the fund value can be paid to you free of tax to invest/spend/generate income as you see fit.

Conventional annuity*There are many permutations to annuities regarding spouses pension, future increases, minimum periods for payment if you die etc. However they all have one thing in common – a guaranteed income for life which cannot (currently!) be changed once set up.

Enhanced annuity*Same as for the conventional annuity but you can qualify for more income if your life expectancy is below the average for example if you are overweight suffer from high blood pressure or smoke.

Income DrawdownYou keep the pension fund invested with the attendant potential risks and returns. You draw income out of the pension and hope that this is replaced by growth in the funds so you can continue to take a good level of income for the rest of your life. Generally there are no guarantees but you get far more flexibility from the choice of income and death benefits.

*For more information call us or ask for a free copy of your guide to the options for your pension funds when you retire.

15

Pension Reforms

The pension reforms implemented in April 2015 are covered in more detail inour Pension guide. However it’s great news for anyone with a pension. Now you can take out what you like whenever you like and what you don’t withdraw in your (or your spouse’s) lifetime is left to family / dependants when you die. With choice of course comes greater need for full consideration of theoptions, and it’s more important than ever that you take advice on what youshould do in your circumstances.

Liz

Liz contacted me 6 weeks before her 55th birthday to say she had been in touchwith her pension company (Standard Life) to ask them to pay out the whole fund(approximately £54,000) as soon as she was 55. They said they could not help, and asked her to seek financial advice - whichafter a Google search, brought her to Lowland’s door. We explained that if sheproceeds with the withdrawal, the pension would be paid as follows:• £13,500 - (25%) tax free• £40,500 - (75%) taxableWhen we checked her personal circumstances we discovered that she wasearning around £31,000. This meant that if she took the entire fund , her totalincome (for this year only) would be £71,500. As tax at 40% is payable on income over £42,385 (2015/16 tax year) shewould have paid 40% on just over £29,000. We further discussed her situationand she confirmed she wanted to give £10,000 to her son to buy a house - hencethe 25% tax free cash. However she did not need the balance for anything in particular so weexplained how she could withdraw around £10,000pa “income”. That would getthe money out in 4 years time with only 20% tax - saving circa £5,800 bykeeping payments under the higher rate tax limit. It’s seldom the right thing to withdraw all of your pension at once - becauseof tax, and the fact that if your pension is spent now - it’s not there to provideincome when you retire.

15

16

Now or never! Three case histories.

Those of you of a certain age may recall a lady called Viv Nicholson who in 1961 won the equivalent of £3 million on the pools. She vowed to Spend Spend Spend which she promptly did till it ran out 15 years later! Whilst I don’t advocate Ms Nicholson’s approach, it is definitely worth looking afresh at your money when you retire. As the expression goes “there are no pockets in a shroud”. This is your chance to indulge yourself, to fulfil that unresolved dream before it is too late.

Business class flights

One client went to New Zealand for the Rugby World Cup with his wife. We had discussed the trip and much to the client’s initial dismay (as he was paying for it!) I suggested they should take some money from the bank and push the boat out and fly business class. Emirates sent a limo to collect them from their door, take them to Newcastle Airport… and meet them again on their return for the ride back home. They called to say thank you – the trip was a huge success and he arrived back at work more refreshed than ever before. Their travel was actually an enjoyable part of the holiday!

Lifetime ambition

Another client told me she had always wanted to visit San Francisco – which we proved was easily affordable when she and her husband finally retired. She is still swithering (old savings habits die hard) but she has promised to send a postcard when she gets there!

More family time

One client was interested in buying a flat in Edinburgh to be near her daughter. Initially I suggested renting a flat for six months to see how it worked. This was very successful and allowed her to decide exactly where she wanted to live. She then decided to buy and after several failed bids got the “ideal flat”, paid for outright from savings and investments which had remained untouched for a number of years.

16

17

Don’t put all your nest eggs in one basketAs you approach retirement there is not the same time to ride out market ups and downs so it is vital to consider the risks and potential returns for funds in which your nest eggs are invested. A ‘bird in the hand’ can be worth having when you need them to hatch! Predicting investment markets is all but impossible, however you can be sure that if you are close to a milestone when you know you might need money – such as retirement, the last thing you need is a sudden nasty fall in the value of your pension fund. Of course it could increase in value, but in my experience protecting against a loss is generally much more important than missing out on a gain! It is easy (and generally costs very little if anything) to switch to lower risk funds. I would suggest that if you intend to retire within five years it is essential that you consider the risks contained in your existing funds. Once you are within touching distance of a key objective in your life such as retirement, if you retain the same funds you are arguably taking more risk because there is less time available to recover after a fall in value. Your personal experiences and approach to investment funds will impact on this important decision. However there are essentially two approaches to your investing as retirement approaches. You may choose to:

Continue with the same investments in the hope of a bigger fund, with the possibility of the fund falling suddenly.This approach is probably best suited to someone with alternative options (money in the bank) to tide you over while you wait for markets to recover. Switch to something less volatile to reduce (or cut out altogether) the potential for a fall in value just when you need the money (‘bird in the hand’).This would be more likely for example if the pension is the most significant part of your retirement plan and you have limited options elsewhere.

18

Long Term CareI could not write a guide to retirement without touching on a subject which is seldom far from people’s minds when considering retirement – deteriorating health and the potential need for care. Care can take many forms – from home help to full nursing assistance in a specialist home. As a result costs can vary significantly. This is a hot political issue at the moment – watch out for developments! The vast majority of my clients take the view that if the situation arises they will deal with the problem. Many have openly stated “give me a pill”. However, it makes sense to ensure there is a broad plan in place to cope.

Where there’s a will....The Will

Whatever age you are, having a will is one of the financial planning essentials. I know it’s easy to put off making a will – my wife and I did because we have a complicated (but not uncommon) family situation where I have four step children and a son: We decided to start with “to each other then the children equally”. Fairness is a good place to start from as is simplicity – but invariably family matters intrude. However let me assure you having a will which broadly reflects your wishes is significantly better than having no will at all. If you die without one, your money may be distributed according to the law rather than how you would want it to be. This could mean that your partner receives less, or that the money goes to family members who may not need (or deserve) it. Don’t forget pension fund values and death in service paid out as lump sums if you die before retiring. Make sure you have completed “nomination forms” for these plans to ensure any payments are paid quickly to the people you want.

Power of Attorney

In addition to having a Will you might like to discuss setting up Power of Attorney to help if you do become unable to make decisions for yourself as a result of accident or illness. A Power of Attorney can help you decide how your health, wellbeing and financial affairs will be looked after. It allows you to plan in advance:

19

• What you want to happen to your money if you lose the capacity to make decisions for yourself • Who you trust to make these important decisions for youSolicitors I have spoken to suggest that Power of Attorney is arguably more important than having a will because the courts take over and appoint someone “at considerable cost” and this can take a long time to arrange. If you arrange both wills and Power of Attorney at the same time it should be more cost eff ective.

Finally

Th is guide should not be seen as Graeme Mitchell giving you advice. It is a combination of general observations and practical suggestions based on my 40 years experience in Financial Services the last 18 of which I have been a Financial Adviser. I hope there will be some nugget that can help you improve things or make the most of what you have in these challenging times. Everyone has diff erent requirements and circumstances so before acting on anything I have drawn to your attention in the guide – you really should take professional advice. I would be happy to hear from you if you have any questions or want to clarify anything you have read. You may feel inspired to review your situation and want to have a quick chat fi rst. I am available on 01896 751007 or you can e-mail me – graeme@lowlandfi nancial.co.uk

All the best for now and the future!

– Graeme Mitchell Managing Director

20

Lowland Financial Services Ltd1 Green StreetGalashielsScottish Borders TD1 3AE

Telephone: 01896 751007Fax: 01896 756100

Web: www.lowlandfinancial.co.ukE-mail: graeme@lowlandfinancial.co.uk

Registered in Scotland, Registered No. SC20278Lowland Financial is a trading style of Lowland Financial Services Limited. Lowland Financial Services Limited is authorised and regulated by the Financial Conduct Authority. FCA Ref No. 202359

The contents of this publication are copyright © Lowland Financial Services Ltd 2015 and may not be reproduced by any means without prior permission. All information is published in good faith and believed to be materially correct at the date of publication, E&OE.

Design Icon Publications Ltd, Kelso