Are Premium Bonds a good place for your savings?

Are Premium Bonds a good place for your savings?

With interest rates low and investment markets experiencing volatility throughout 2020, you may be looking for an alternative place to put your money. Premium Bonds are an option you may be considering, but you could end up missing out on returns.

What are Premium Bonds?

Premium Bonds are a type of investment product issued by National Savings & Investment (NS&I), but they work differently to other types of investments for two key reasons:

  1. The money you place in Premium Bonds is safe and fully backed by the government. This means when you want to withdraw your money, you’ll receive the same amount you deposited.
  2. Rather than receiving interest or investment returns on your money, you’ll be entered into a monthly prize draw. Prizes range from £25 to £1 million. The more bonds you purchase, the more times you’re entered. Prizes won are free from Income Tax and Capital Gains Tax.

As a result, if you’re lucky, your Premium Bonds could earn you far more than a savings account or investments if you won one of the larger prizes. However, there’s a real chance you’ll receive nothing at all.

One of the reasons that Premium Bonds are attractive is that your deposits are secure. When you decide to withdraw your money, you’ll receive the same amount you put in, but once you factor in inflation, your savings will be lower in value in real terms. This is because the cost of living rises each year and, unless your saving increase by the same amount, your money buys less. In the short term, this effect is minimal. However, look at the impact of long-term inflation and it can be significant.

To keep pace with inflation, your Premium Bonds would consistently need to win the prize draw. So, how likely is that?

According to Money Saving Expert, if you placed £5,000 in Premium Bonds and had average luck, you’d expect to win roughly £50 a year. Of course, there are thousands of people with Premium Bonds that have below-average luck and are potentially missing out on returns.

Recent change means 1 million fewer Premium Bond prizes every month

Since their introduction, Premium Bonds have been popular products. In fact, over 21 million people hold Premium Bonds and over £80 billion is placed in them. But changes in November 2020 mean they’re not as attractive as they once were.

Previously, the prize rate for Premium Bonds was 1.4%, this means each £1 bond had a one in 24,500 chance of winning a prize. The change meant the prize rate was slashed to 1%, resulting in odds of one in 34,500 per bond. That means over one million fewer prizes are given out each month.

As a result, there’s now a greater chance that your Premium Bonds will earn nothing at all, and inflation will affect the value of your savings.

With this in mind, should you use Premium Bonds?

As with every financial decision, the answer will depend on your goals and situation. If you’re looking to create a regular income or guaranteed returns, Premium Bonds are not likely to be the right product for you. However, if you’ve made use if other tax-efficient allowances, such as the Personal Savings Allowance and ISA allowance, they can be a useful option to consider.

How do Premium Bonds compare to savings or investments?

Before you decide if Premium Bonds are the right option, you should weigh up the alternatives too.

Savings: If the security of your money is important, a traditional savings account may be the right option. Assuming you stay within the limits of the Financial Services Compensation Scheme, your money is safe. It will earn regular, guaranteed interest. However, interest rates are low and can mean your savings don’t keep pace with inflation. If you’re in a position to do so, choosing products with restrictions, such as locking your money away for a defined period, can help you access higher rates of interest. Saving accounts are a good option for emergency funds and short-term saving goals.

Investing: If it’s the potentially higher returns that are attracting you to Premium Bonds, investing may be an option. Money invested can deliver returns higher than interest rates, but this is not guaranteed, and your money will be exposed to investment risk. This means that your initial investment can fall, as well as rise, in value. Over the long term, investments have historically delivered returns, so a minimum timeframe of five years is advisable when investing. If you’re focused on long-term returns, investing could provide an alternative to Premium Bonds.

Finding a home for your savings

There’s no right or wrong answer when deciding where to put your money, but it’s essential that you consider what you want to get out of it and your financial circumstances. Please get in touch to create a financial plan that considers your options, whether you have a lump sum to save or want to make regular deposits.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment 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.

Pension gap: How can women improve their security in retirement?

Pension gap: How can women improve their security in retirement?

We hear a lot about the gender pay gap, but one area that’s often overlooked is the knock-on effect this has for retirement savings. While progress has been made, on average, women are reaching retirement age with far less put away than their male counterparts.

The £100,000 pension gap

Eight years after auto-enrolment was introduced, the pension gap is closing.

As a percentage of earnings, 59% of women are now saving adequately for their future, according to a report from Scottish Widows. This is just 1% behind men and the narrowest gap on record. However, despite men and women saving broadly equal shares of their income, the amount they are ending up with at retirement varies significantly due to the pay gap.

On average, women are saving £1,300 less each year than men. Over a career, this adds up to a pension gap of £100,000. It’s a figure that can significantly affect financial security once giving up work and what is achievable in retirement.

There are many reasons why women are saving less. One of the key factors is that women are more likely to take a career break or work part-time, especially when they have young children. In fact, 75% of part-time workers are women. Women are more likely to work in low-income positions too. The average annual difference in median wage between men and women in full-time work is £6,100.

When looking at these differences, the focus is often on the short-term financial impact. However, the long term, and what it means for retirement, is just as important. There are some steps women can take to improve their financial security later in life.

1. Start saving into a pension as soon as you can

Retirement saving can seem challenging. The goal sum you want to achieve at retirement is large. However, you’ll be saving this over your entire career. Spread out across four decades, the amount can seem less daunting.

It’s never too late to start saving into a pension, but it’s never too early either.

The sooner you start saving into a pension, the better the position you’ll be in. To achieve the same goal, your regular contributions will be less. You’ll also have longer to benefit from investment returns, boosting your retirement fund further. Despite this, 17% of women aren’t saving anything at all. Even small but regular contributions can add up.

2. Take some time to review your pension arrangements

Under auto-enrolment, most workers will now be automatically enrolled in their Workplace Pension scheme. It’s worth taking some time to understand what you’re contributing, what your employer is contributing, and how pension investments are helping these contributions to grow. Your pension provider will also provide a pension forecast, showing an estimate of what your pension is expected to be worth at retirement. It can help you see if you’re on track.

You may also have pensions from previous employers too. Review these alongside your latest one. In some cases, it makes sense to consolidate pensions into a single pot, making your savings easier to manage.

3. Speak to your employer

Speaking to your employer can help you understand the benefits on offer.

For example, if you’re not eligible for auto-enrolment, your employer may still offer you a Workplace Pension scheme if you speak to them. There may also be other options for improving your long-term financial security, such as a salary sacrifice scheme that will increase pension contributions.

Under auto-enrolment, if you contribute to a Workplace Pension scheme, your employer must also contribute to it. This is currently 3% of pensionable earnings. However, some employers will increase this if you increase your contributions too. As a result, it can be worthwhile increasing your own contributions to benefit from this.

4. Continue contributing even when you’re not enrolled in a Workplace Pension

You don’t have to be part of a Workplace Pension scheme to continue adding to a pension. Whether you’re taking a career break or aren’t eligible for auto-enrolment, setting up your own contributions can help close the gap and keep retirement plans on track.

You can choose to open a Personal Pension or contribute to existing schemes, such as old Workplace Pensions. Even small, regular additions to your pensions can add up over the long term and improve your retirement prospects. You can also choose to add a lump sum to pensions.

5. Weigh up the pros and cons of diverting savings into a pension

When we think of financial security, it’s often the short-term we focus on. Given that 72% of women have experienced financial hardship, it’s not surprising that pensions can be an afterthought.

However, there are benefits to saving in a pension if you have long-term goals. You will receive tax relief on your pension contributions. That means an extra 20% will be added if you’re a basic rate taxpayer, and more if you’re a higher or additional rate taxpayer. It gives your savings an instant uplift. As pension contributions are invested, they also aim to deliver long-term returns.

If you’re in a position to do so, diverting money from your usual savings into your pension can make sense. However, you need to keep in mind that your pension money will not be accessible until you’re 55, rising to 57 in 2028. As a result, you need to be in a secure financial position and have an emergency fund in place before doing so.

The research found that 58% of women are worried about running out of money in retirement and 55% don’t feel like they’re preparing adequately. If you’d like to discuss your current pension arrangements and what you can do to secure the retirement that you want, please contact us.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

The importance of taking stock of your pension withdrawals after market volatility

The importance of taking stock of your pension withdrawals after market volatility

2020 saw a lot of volatility within investment markets. While vaccine news means there is hope for battling Covid-19 in 2021, there’s still a lot of uncertainty. If you’re retired and are taking a flexible income from your pension, it’s likely your pension is invested, so it’s important to take stock of how it has been affected.

If you chose to access your pension flexibly using a Flexi-Access Drawdown scheme, your pension savings will typically remain invested throughout retirement. This gives your pension an opportunity to deliver returns, but also means you remain exposed to investment risk. With this option, you’re also responsible for ensuring your pension will provide an income for the rest of your life.

As a result, keeping an eye on performance and the impact of withdrawals is important.

2020: Covid-19 volatility

Investment markets often experience short-term volatility, but 2020 saw more than most. In fact, markets experienced some of the sharpest declines they’ve seen in decades.

As the Covid-19 virus spread and was declared a pandemic, markets reacted to the news and the steps governments took to slow it. This led to sharp dips in March, followed by ups and downs throughout the rest of the year. As your pension is invested, the value of your savings will have been affected.

However, it’s important not to focus on the headline figures. A well-diversified portfolio will hold assets across a variety of industries and geographical locations. This means your investments are unlikely to have suffered dips as sharp as those stated in the headlines. While some sectors have been badly affected, others have seen a small impact and some have even benefited.

The FTSE 100, for example, suffered its worst year since the 2008 financial crisis, with the index falling 14.3% during 2020, according to the Guardian. But this was the worst performance among the largest international stock indexes. Look at the wider global market and you’ll find records too. World stock markets are ending 2020 up 13%.

Why investment performance is important when taking a flexible income

If you’re investing with a long-term goal in mind, short-term volatility generally has little impact on your overall strategy and goals. However, this changes if you’re taking a regular income from the investments. This is because you’ll be taking an income when the market is at low points.

When you make a withdrawal when the market has dipped, you need to sell more units to achieve the same income. This can mean your investments are depleted quicker than expected. You also have less in your pension to benefit from any rises that may follow, which can mean returns fall short of expectations too.

Therefore, regular reviews when you’re using a Flexi-Access Drawdown scheme are important to ensure your retirement income remains on track.

5 things to do when reviewing your pension

If you take a flexible income, don’t panic. If you worked with a financial planner, volatility will have been considered when setting out a plan and there are often steps you can take to bridge gaps to ensure your long-term finances remain secure.

Here are five things to do to review the impact of volatility in your pension:

  1. Review pension values: The first step to take is to see what the value of your pension is now. This will give you an idea of how volatility and withdrawals have affected investments.
  2. Look at your lifestyle plans: The above figure alone isn’t enough to understand if volatility has affected your retirement plans. You also need to consider your lifestyle, how long your pension needs to last for, and the income required.
  3. Consider investment growth: Remember, your pension savings remain invested, so over the long-term should benefit from investment growth. This can help your savings keep pace with inflation and provide you with security throughout retirement.
  4. Calculate if there will be a gap: With an understanding of how your pension will grow and the income needed for your lifestyle, you’re in a position to see if volatility has left you with a gap and where additional steps may need to be taken. We understand this can be difficult to do, which is why working with a financial planner can offer you peace of mind.
  5. Book a meeting with a financial planner: Pulling together the different pieces of information to see if the market volatility will have an impact on your plans can be difficult and time-consuming. We’re here to help you with the process and give you peace of mind that your retirement income is secure. If adjustments do need to be made, we can work with you to provide a solution that matches your aspirations.

One of the steps you can take to protect against future volatility is to reduce or pause pension withdrawals during these periods. Ideally, you should have three to six months of expenses in a cash account that you can draw upon in these circumstances. This can help protect your long-term income.

Please get in touch if you’d like to review your pension and wider financial plan.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

The 2020/21 end of the tax year guide

The 2020/21 end of the tax year guide

The current tax year will end on 5 April 2021, a date when many allowances and tax breaks will reset. In some cases, it will be your last chance to use them. Making use of appropriate allowances can help you get the most out of your money.

Our guide explains seven key allowances you should consider to ensure you’re ready for the 2021/22 tax year. This includes:

  1. Marriage allowance
  2. Pension Annual Allowance
  3. ISA allowance
  4. Gifting allowance
  5. Gifts from your income
  6. Capital Gains Tax
  7. Dividend allowance

Click here to download your copy of the guide.

Keeping on top of allowances and how to use them can be challenging. But creating a financial plan that helps you get the most out of your money can put your mind at ease. Please get in touch to discuss how you can make the most of allowances in the current tax year and put a plan in place for 2021/22.

How to be with family over the festive period this year

How to be with family over the festive period this year

This year has been challenging for many of us. With families restricted on when they could meet up due to the Covid-19 pandemic, many have been looking forward to Christmas and the time traditionally spent with loved ones.

Reports suggest that up to three households can form a bubble and get together for a few days around Christmas. However, the new year is expected to involve restrictions. Even with the ability to form a bubble, you may not be able to see all your family and friends as you normally would over the festive period. But that doesn’t mean you can’t celebrate together.

Keep in mind too, that Covid-19 restrictions may change at short notice. While it’s hoped that families will be able to spend Christmas day together, there’s no guarantee and it will depend on how the situation develops.

While a ‘normal’ Christmas and new year are unlikely, there are ways you can be with loved ones over the coming weeks.

Plan video calls to mark usual traditions

If you’re not able to be together, video calls are a great way of keeping in touch and carrying out the usual traditions.

Having a plan for the most important ones can mean loved ones are still involved in the celebrations, even if you can’t be together. That might mean using Zoom to schedule a call so you can watch grandchildren open their Christmas presents in the morning or swapping Christmas cracker jokes in the afternoon. Scheduling the calls can help everyone organise their day and ensure things aren’t missed simply because other things are going off.

Think about the parts of Christmas that are the most important to you and your family when arranging calls.

Go for a socially distanced walk

Getting outdoors for a walk in winter can be magical. While most of us often spend Christmas indoors, a walk can be a great opportunity to spend time with loved ones. A walk around a local park that’s covered with frost can really put you in a festive mood. Plan ahead and take a flask filled with hot chocolate or mulled wine to get you into the holiday spirit too.

Remember to check local restrictions before making plans outside of a bubble and stick to the social distancing guidelines where possible.

Discover online games and quizzes

If your family is a fan of playing board games and quizzes when together, finding online alternatives can be a fun way to connect this year.

For board game fans, there are plenty of options online. If you have a family favourite, try giving it a search on Google, the most popular ones often have online or app-based options. But if you’re looking for something new, there are dedicated websites worth exploring, including Board Game Arena and Tabletopia. Both have free to play options and premium games that you need to pay for.

For quizzes, there are once again plenty of online options to try. But if you have a quiz expert in your group, asking them to put together some questions can make the game more personal to you. Kahoot! is an excellent app that lets you host a quiz with each player using their phone to answer questions.

Don’t give up traditional games either, with a bit of creative thinking, you can set up a game of charades or Pictionary over a video call too.

Plan ahead

Making plans for Christmas always means thinking ahead, from when to get the turkey to putting up the decorations. But this year’s restrictions mean a little more planning can go a long way.

For instance, pass presents on to recipients before the big day, ensuring they’re able to open them even if plans are forced to change last minute. The postal service is always busy this time of the year, but expect more delays than normal as people turn to online shopping options. So, order gifts and send any cards as early as possible.

While a plan can help you get the most out of Christmas this year, they may have to change too. Expect the government to amend restrictions and guidelines both nationally and regionally as new information is available. Keep in touch with friends and family to make sure everyone is clear on what your plans are over the festive period.