Your Retirement - United Utilities · • Salary £30,000: • Income Tax • National Insurance...

Your Retirement

v1.0 April 2018

About us

We are a specialist provider of financial education in the workplace.

We help employees understand how to maximise their workplace savings and benefits in the context of their overall financial position, by delivering financial education and guidance which is tailored to their needs.

We pride ourselves on having detailed knowledge of company benefits.

Some of our clients

• When can I retire?

• State Pension

• Your United Utilities Pension

• Receiving an income from DC pensions

• UU DB Section income and transfers

• Non pension savings

• Estate planning

• Next steps

What we’ll cover today

When can I retire?

Voluntary work

Pastimes

Hobbies

More time with the family

RelocationSports

Adrenaline Junkie

Relaxation

Further education or study

Work – perhaps part time

TravelNo plans

What does retirement

mean to you?

What does retirement mean to you?

Sleep – 8 hours?

Preparation, Commuting & Work – 10 hours?

Errands & Eating - 3 hours?

Leisure – 3 hours?

Before leaving employment

Change in use of your time

Sleep – 8 hours?Errands & Eating - 3 hours?

Leisure – 3 hours?

After leaving employment

Change in use of your time

If living with a partner consider how you will

Feel about spending more time together

Spend ‘shared time’

Spend ‘own time’

Effect on relationships

If living alone

Will you spend more time alone?

How frequently will you meet up with friends / family?

According to research by Age UK, loneliness can be as harmful for your health as smoking 15 cigarettes a day

Effect on relationships

Didn’t share the same hobbies or interests anymore

4 in 5

Argued about finances

1 in 5

Spent much of their time arguing about silly things

1 in 3

Source: Skipton Building Society

And 13% irritated each other beyond belief!

Effect on relationships

Reasons to move?

• Closer to family

• New location

• Something more suitable

• Release equity

Considerations

• Stress of moving

• More time travelling to meet up with friends and family

Moving house

Volunteer to help charities and local community groups40%

Of those volunteered to help others62%

Of those volunteered to become more socially active

17%

Saga Volunteer Survey – Over 50s

Volunteering opportunities

More information on volunteering opportunities visit:

do-it.org

volunteeringmatters.org.uk

charityjob.co.uk

Volunteering opportunities

TravelPerfect time to start travelling

Learn something newFun or an official

qualification

ExerciseGovernment guidelines recommend 2.5 hours of moderate exercise a week

Clubs & AssociationsSocialise & entertainment

Hobbies and interests

Identify why you want to work

Is there a financial need?

• You may be able to work in areas you enjoy, even if low paid

• Consider self employment – do you have any skills you can “sell”

• Is it to replace the things you will miss when you retire?

• Such as colleagues, socialising, structure, purpose, motivation etc.

Work after you retire

Considering the changes

How will you replace these things?

Time away from your partner

Purpose &

motivation

An interest in common –

something to talk about

Routine & structure

Companionship

What work gives you

*Only those earning less than £100,000 get full tax free personal allowance

If you live in Scotland you will pay tax on your earnings, pension and most other taxable income based on the Scottish income tax rates

Income tax

PersonalAllowance

on the first

£11,850*

Basic

Rate Tax

on the next

£34,500

20%

Higher Rate Tax

on the next

£103,650

40%

Additional Rate Tax

on earnings above

£150,000

45%

• The first £8,424 you earn is free from National Insurance

Lower Earnings Limit (LEL)

on the first

£6,032on the next

£2,392on the next

£37,926on earnings above

£46,350

No NI & No Credit

12% 2%No NI, but Automatic

Credit

PrimaryThreshold (PT)

Upper EarningsLimit (UEL)

National Insurance

The total number of centenarians in 2016 was 14,910

The total number of centenarians expected in 2039 is….

82.979.2

83.5 85.9

Source – Office of National Statistics. National life tables, UK: 2014 - 2016, data released Sept 2017

83,300

From birth

From age 65

From birth

From age 65

1 in 4 chance of reaching: 94

1 in 10 chance of reaching: 99

1 in 4 chance of reaching: 96

1 in 10 chance of reaching: 100

Average life expectancy for the UK

Expenditure in retirement

Mortgage / Loans / Credit Cards

SAME DOWNUP

Holidays

Leisure

Hobbies

Motoring / Travel

Food & Clothing

Household Utilities ?

???

??

?

When can I afford to retire?

• Salary £30,000:

• Income Tax• National Insurance• Pension contributions (7%*)• ShareBuy• Mortgage• Loans

• Pension £12,000:

• Income Tax

£3,210£2,337£2,100£1,800 £6,000£2,400

£12,153 Remaining

£30

£11,970 Remaining

Typical example - Tax year 2018/19

*Assumes contributions are paid using salary sacrifice

Your retirement income

Your retirement income is likely to come from a number of different places. These may include:

Retirement Income

State PensionCash from

downsizing home

Part Time WorkUU ShareBuy

UU Pension SchemeOther pension

schemes

State Pension

When will I receive the State pension?

Male and female SPA is aligned for those with a DOB after 6/12/53Visit www.gov.uk/state-pension-statement

DOBBefore

6/4/50 6/12/53 6/10/54 to 5/4/60

Female SPA 60

Male SPA 65 SPA 65 SPA 66

sliding scale sliding scale

When will I receive the State pension?

Male and female SPA is aligned for those with a DOB after 6/12/53Visit www.gov.uk/state-pension-statement

SPA 68

6/10/54 to 5/4/60 6/3/61 to 6/4/77

SPA 66 SPA 67

sliding scale 6/4/78sliding scale

New State Pension: how much can I expect?

• If you reach State Pension age after 5 April 2016

• The new State Pension can provide £164.35pw (current rates)

• A reduction to this may be applied if:

• You have less that 35 years of National Insurance (NI) contributions

AND/OR

• You have been contracted out of the Additional State pension

• Every year of NI contributions gained from 2016/17 to the year before you reach State Pension Age will make the deduction less

Your United Utilities Pension

Defined benefit pension schemes

• Sometimes referred to as final salary or career average schemes

• Both you and your employer may make contributions

• You will build up the right to a pension income

• Option of taking some benefits as a tax free lump sum

Defined contribution schemes

• Sometimes referred to as money purchase schemes

• Many workplace pensions are now defined contribution schemes

• You build up a ‘pension pot’ and you choose how this pot of money is invested

• You choose how you generate an income in retirement

Changes to the UU DB Sections

From 1st April 2018, the way your DB pension benefits accrue changed

You had a choice of two options on how your future benefits would accrue:

• Defined contribution option

• Hybrid option (default) – a combination of defined benefit and defined contribution elements

The defined contribution option

• Contribution rates are between 3% and 7% pensionable earnings

• United Utilities pay twice what you pay – between 6% and 14%

• On retirement, access to secure and flexible retirement income options

Invested

Receive up to 25% tax free

Taxable lump sum or generate a taxable income

with remaining pot

Member contributions

2 for 1 employercontributions

Tax free growth

United Utilities pension scheme contributions

*Tax relief is only available on contributions up to the greater of 100% of relevant earnings or £3,600

Your pension contributions benefit from:

• PensionSaver – a salary sacrifice arrangement saving you National Insurance on the contributions you make, and

• Tax relief at your marginal rate*

Example: Defined contribution option, uncapped pensionable earnings (UPE) of £30,000 and 7% employee contributions

You pay 7% of your UPE - £175 pm

12% National Insurance saving - £21 pm20% Income Tax relief - £35 pm

£119 pm

£175

United Utilities pay 14% - £350 pm

£525 You benefit from a pension contribution worth over 340% the amount it cost you

DC investment choices

• The pension contributions are invested

• Check whether the investments are aligned with your plans

• You also have the choice to select from :

• Lifestyle Funds – retirement cash fund, retirement secure income fund & retirement flexible income funds

• Non-Core Funds – self-select funds from a wider range of investment options

• The default investment is a retirement cash lifestyle strategy fund

Lifestyle strategy funds

• During your career your pension investments are predominantly held in higher growth investments

• Your exposure to higher growth investments will automatically reduce as you approach retirement

• The investments are switched into defensive funds

• Assumed retirement age is 65 – if you wish to retire at a different age you should contact the administrator to change your selected retirement age

• You can choose between three lifestyle funds

• Each lifestyle fund has been designed for a different retirement income option

• The default option is The Retirement Cash Fund

• The fund has been designed for those who wish to take all of their pension savings as cash at retirement (a maximum of 25% can be taken tax free)

Lifestyle strategy funds

0%

20%

40%

60%

80%

100%

10 9 8 7 6 5 4 3 2 1 0

BlackRock 30/70 Equities Global Absolute Return Bonds CashYears to retirement

• The retirement cash fund targets cash, see below

• The retirement secure income fund targets an annuity purchase

• The retirement flexible income fund targets flexi-access drawdown

Non-core funds

• Choose your own investments from a range of funds

• Decide how much to allocate to different types of investments (e.g. equities, bonds or cash)

• Manage your own risk exposure as you approach retirement

• Manually adjust your investments inline with your retirement income plan

• Remember to review regularly

Your retirement incomeYou may have access to both a secure and flexible income in retirement

State PensionSecure income -Remember to check your State Pension Age

DB pensionsSecure income -From United Utilities and/or possibly a previous employer

United Utilities DC PensionFlexible income –This could be part of your DB scheme if you are a DB member

Other DC pensionsFlexible income -From previous employers or those you have set up yourself

Income In Retirement

Your retirement income

Work out how much secure pension income you have

Remember to get a state pension forecast

Consider the income flexibility you may want

Get a value for any DC benefits you may have

Your current holdings and whether you require a flexible income are likely to impact the best course of action

Defined benefit pensions vs defined contribution

You will receive a rigid amount throughout your retirement

Access to pension freedoms gives you the choice to vary your pension withdrawals throughout retirementRetirement

income

The DB pension increases annually in retirement.

No guaranteed protection against inflation unless an inflation linked annuity is purchased. Above inflation rate of return is possible

Inflation in retirement

The ups and down of investments makes no difference to the amount of pension you receive

Contributions are invested and the performance of the investments will affect your pension incomeInvestment

risk

Normal pension age of State Pension Age – taking benefits earlier may not be on favourable terms

You can take benefits from the DC sections from the age of 55. But your pot will be lowerRetirement

age

Defined benefit pensions vs defined contribution

If you die, the DB pension will pay a pension to your spouse

Provision for a dependents pension depends on the pension income product(s) selectedPension for

dependents

Rigid pension income makes tax planning difficult

Potentially lower tax bill by varying pension withdrawalsTaxation

You know your pension will last as long as you do

You could run out on money too early. However this risk can be managed and certainty can be provided by annuities

Certainty

Once in payment the only death benefit is the dependents pension. If you have no qualifying dependents your pension dies with you

Inheritance

Your DC pot could be passed to your successors, in some scenarios completely tax free

Limits to tax efficiency

Lifetime allowance

• The lifetime allowance is £1.03m

• About £50,000pa pension for defined benefit members

• Defined benefit pensions converted at 20:1

Annual allowance

• The annual allowance for the 2018/19 tax year is £40,000*

• Unused annual allowance from the 3 previous tax years may be carried forward

• If you have total taxable income above £110,000, you may have a reduced annual allowance

*Tax relief is only available on contributions up to the greater of 100% of relevant earnings or £3,600

Receiving a pension income from DC pensions

Income options – DC benefits

Options apply to defined contribution benefits only

United Utilities pay for you to receive a guidance call to help you make your

pension income decision.

Pension PotTax Free

Cash

AnnuityRemain Invested

Cash Lump Sum

Defer Income

Drawdown Income

Taxable Income

Buying an annuity

The annuity rate you receive will be dependent on personal circumstances including:

• Your age

• Your Health

• Whether you smoke

• Where you live

Buying an annuity

AnnuityIndex Linking

Spouse’s Pension Guarantees

Impaired Life

Health ConditionsDefer The Decision

Buying an annuity

Advantages Disadvantages

• Guaranteed income for life

• No investment risk

• Can provide an income for

your partner

• No need for ongoing

reviews

• Index-linking available

• Irreversible

• Potentially low rates

• You may outlive your

spouse

• Inflexible for estate

planning

• Future health conditions

are not applied

Receiving a taxable lump sum

Tax Free Cash

Taxable Lump Sum

• £0 to £11,850 = 0%

• £11,850 to £46,350 = 20% tax

• £46,350 to £150,000 = 40% tax

• £150,000> = 45% tax

You may be receiving other taxable income, such as the State Pension, which will use up some of your personal allowance

Receiving a taxable lump sum

Ben retires with a £100,000 DC pension fund. He chooses to draw his entire pension fund in his first year of retirement.

£46,350

£11,850

20%

40%

Tax Free Cash

Taxable

• £75,000 of Ben’s pension will be assessed for tax

• The first £11,850* will be within his personal allowance

*Assumes no other earnings in the tax year. Your pension provider may apply emergency tax which may mean you have to request a tax refund

• £34,500 taxed at 20% = £6,900

• The remaining £28,650 taxed at 40% = £11,460

• Total tax bill = £18,360

Income drawdown

Tax Free Cash

Taxable withdrawals

• Choose how much you withdraw

• Take monthly withdrawals

• Or any other frequency

• Adjust your income in the future

• You can choose to buy an annuity in the future

Remaining pension invested or held as cash

Income drawdown

£46,350

£11,850

£0

0%

20%

40%

State Pension

DC pension withdrawals

Income drawdown

Advantages Disadvantages

• Income flexibility

• Draw as much as you like

• Benefit from any investment growth

• Buy an annuity at a later date

• Pass remaining funds to a beneficiary

• No guarantees on income levels

• Risk of depleting your savings

• Exposure to investment risk

• No guarantee of future value

Phased receipt of tax free cash

Taxable withdrawal

• Choose how much you withdraw

• Of this withdrawal, 75% is taxed

• The remaining 25% is tax free

Tax Free Cash

Remaining pension invested or held as cash

UU DB Section income and transfers

DB schemes – UUPS and ESPS

• You can apply to have your pension paid before your NPA

• An early payment reduction may apply

• All benefits have to be taken at the same time (apart from AVCs)

• Potential to take advantage of the new flexibility by transferring into a personal pension

• Financial advice must be received for this type of transfer*

• You can obtain a pension estimate by contacting the scheme administrators

*Members are not required to take regulated advice if the transfer value is below £30,000

UU DB Section members

• You have the option to transfer your defined benefit pension into a defined contribution scheme

• Your guaranteed UU DB income is converted into a lump sum

• This lump sum can be used to create a flexible income

• Or it can be drawn in one lump sum

• 25% of this pension can be received tax free

• The remainder is taxable on receipt

Transferring form the UU DB Section to a DC scheme

Consider what you would be giving up by making a transfer from the UU DB section to a defined contribution scheme

DC SchemeUU DB Section Versus

Guaranteed pension income for life

Pension savings could run out before you die

An income that is index linkedNormally invested and can increase or decrease in value

A pension income for your partner when you die

No guarantee that there will be pension savings remaining when you die

Flexible income tailored to your circumstance

No guaranteed income

Access to a lump sum This lump sum may need to last your entire retirement

Use the money for estate planning

No guaranteed spousal pension without an annuity

Potentially lower tax bill with careful tax planning

Ongoing decision making and careful tax planning needed

Benefit from a rising stock market

Lose out if the stock market falls

There are a number of potential benefits to holding a defined contribution pension, however you will need to keep in mind that you are taking on the risks.

Transferring form the UU DB Section to a DC scheme

Non pension savings

United Utilities ShareBuy

Options on retirement from United Utilities

• Shares cannot remain in the plan after leaving service

• Option 1 - sell all the shares immediately

• No Income Tax, National Insurance, or Capital Gains Tax payable

• No ‘clawback’ of matching shares

• Option 2 - have the shares transferred to your ownership

• No Income Tax, National Insurance, or Capital Gains Tax payable, but future gains may be subject to Capital Gains Tax

• No ‘clawback’ of matching shares

United Utilities ShareBuy

Do you hold United Utilities shares (or other company shares) you intend to use to help fund your retirement?

• Consider transferring these shares into an ISA

• You may choose to combine ISA withdrawals with a pension income

• Careful planning may help you lower your tax costs in retirement

• Consider diversifying the investments you hold

Taking risks with your savings

What types of risk may you need to consider with your savings?

Cash

Inflation risk Interest rate risk Currency risk

Equities

Market risk Company specific risk Timing risk

Property

Liquidity risk Void periods Taxation risk

Bonds

Default risk Credit risk Inflation risk

Risk and returns

The more risk you are willing to take – the higher the POTENTIAL return

Cash

Bonds

Property

Equities

Potential return

Risk

Potential Loss

Risk and returns – the real world

£70

£120

£170

£220

£270

£320

£370 FTSE All Share Total Return

Bonds

UK Average Earnings

UK RPI Index

Cash

Total Return Over Period 31/12/1997 - 31/12/2017

FTSE All Share TR 236.56%

IA Sterling Corporate Bond 154.48%

Cash** 61.17%

UK RPI Index 73.81%

UK Average Earnings* 81.49%

The value of £100 originally invested 31/12/1997 by 31/12/2017

Source: Financial Express & BloombergUK Average earnings is calculated using: UK Avg Earnings Whole Economy SA. 31/12/1997 - 31/07/2010 and UK AWE Regular Pay Whole Economy Value SA. 31/07/2010 - 31/12/2017.** Cash is calculated using: FE FER Cash Proxy

Capital Gains Tax

• A tax on gains when certain investments are sold or transferred

• Main exemptions are:

• Your main residence

• Investments held in an ISA or pension

• Transfers between spouses or civil partners

• Annual exemption - £11,700 (2018/19)

• Taxable gain is added to income to determine the rate of tax payable

• Gains within basic rate income tax band are taxable at 10%

• Gains above basic rate threshold are taxable at 20%

• There is an additional 8% surcharge to be paid for gains on the sale of second properties (e.g. buy to lets)

Capital Gains Tax

• Other main exemptions are:

• Principal private residence

• British Government Bonds (Gilts)

• National Savings

• Individual Savings Accounts (ISAs)

• ‘Pooling’ applies to shares acquired in the same company at different prices – worked example in a moment

• Matching Rules -

• sales and purchases within 30 days are ‘matched’

• originally introduced to prevent ‘Bed & Breakfasting’

Personal Savings Allowance

• Basic rate tax payers can receive up to £1,000 in interest tax free each year

• Higher rate tax payers have a Personal Savings Allowance of £500

• Additional rate tax payers do not have a Personal Savings Allowance

• If you exceed your allowance, you will pay tax at your marginal rate

Tax Free Dividend Allowance

• All UK tax payers have a £2,000 Tax Free Dividend Allowance

• You will not pay any tax on dividends received in a tax year within this allowance

• The tax you will pay on dividends that exceed your allowance will be dependent on your tax rate

• 7.5% on dividend income within the basic rate band

• 32.5% on dividend income within the higher rate band

• 38.1% on dividend income within the additional rate band

Tax Free Dividend Allowance

20% 40%20% 45%

£11,850 £46,350 £150,000£100,000

0% 60%0%

£123,700£34,500

£44,000Earnings

£6,000Dividends

£2,000tax free

32.5% tax

£1

,00

0 b

ank in

tere

st

ISAs

• An ISA protects your savings from taxation

• Interest and dividends are tax free

• Growth is free of Capital Gains Tax

2018/19ISA allowance

£20,000

Estate Planning

Nil Rate Bands

• Inheritance Tax (IHT) is a tax charge applied to an individuals estate, usually at the point they die

• There are two separate nil rates bands that may be applicable to an estate before calculating an IHT charge

• In the 2018/19 tax year these are:

• The residence nil rate band of £125,000

• The nil rate band of £325,000

• The residence nil rate band is only applied to a home that is left to a direct descendant

• The nil rate band can be applied to any part of an estate that is chargeable to IHT

Nil Rate Bands

• The residence nil rate band is £125,000 in the 2018/19 tax year

• This will gradually increase to £175,000 in the 2020/21 tax year

• The nil rate band of £325,000 and the residence nil rate band of £175,000 could provide a combined IHT exemption of £500,000

• Where a spouse has been passed both nil rate bands by their deceased spouse this will double their combined IHT exemption to £1,000,000

Date Standard Nil Rate Band Residence Nil Rate Band*

2018/19 £325,000 £125,000

2019/20 £325,000 £150,000

2020/21 £325,000 £175,000

*There will be a tapered withdrawal of this allowance for estates with a net value exceeding £2m

Your estate

A person’s estate is made up of everything they own at the point they die. This may include:

Savings and investments£50,000

Personal Possessions£20,000

Home

£400,000

Total Estate = £470,000

£125,000 residence nil rate

band

Your Estate

• £125,000 of the £400,000 home would fall within the residence nil rate band

• The next £325,000 of the estate (including the remaining part of the home) would fall within the nil rate band

• £20,000 of the estate would exceed the combined value of these nil rate bands

• This £20,000 would be taxed at 40%, resulting in a £8,000 IHT charge

£325,000 nil rate band

£20,000 Chargeable

To IHT

Intestacy rules

Married / Civil Partnership?

Do you have children? Do you have children?

Spouse receives everything

Yes

No

No

Parents, siblings, grandparents, aunts/uncles

or crown take all

NoYes

Spouse gets £250,000 & half of the remainder. Children

get the rest

Yes

Children receive everything

If you were to die without a valid will, intestacy rules would apply. The rules that apply depend upon your personal circumstances.

Writing a will

• It is advisable to always ensure you have an up to date will in place

• Updating or re-writing your will is particularly important after a significant life event, such as marriage or the birth of your child

• Divorce will automatically remove any entitlement to your ex-spouse from your will

• A solicitor will be able to produce a valid will for you

• You should only consider writing a will yourself if you are confident about its validity

• You should also regularly review your death nominations for both your life assurance and pension provided through United Utilities

What can I do now?

Taking action• Consider what lifestyle you want in the future

• Get a State Pension forecast

• Check your pension statements for each of your schemes

• Calculate your total pension income after tax

• Calculate the tax free lump sums that are available

• Do you have enough secure income? How much flexible income will you have?

• Add up your savings and investments

• Decide if you will use these to help fund your retirement

• Carefully plan you retirement income to ensure you are not paying more tax than necessary

• If appropriate, obtain regulated financial advice

Next steps

Between now and when you retire

• You will receive updates from the Scheme administrators and the UU Pensions Team

• Ask the administrators if you need any help with your retirement planning or see unitedutilities.com/pensions

• Approximately 18 months before you retire – you will be invited to a Pre-Retirement course

• UU will assist DC and AVC members by providing a specialist company to guide you through your retirement options

Access to the slides

Access to the slides and a password will be emailed to you following this session. Please do not share this with anyone

who has not attended the seminar.

Education caveat

• my wealth contact number: 0800 028 3200

• The content of this presentation is provided for illustrative purposes only and is not intended to be used for individual investment or financial planning and does not constitute financial advice.

• Whilst every effort is made to ensure the accuracy of information contained in the presentation it cannot be guaranteed. In particular the rules relating to tax can frequently change.

• Any reference to tax or the operation of tax or tax reliefs are illustrative only and the tax treatment in respect of any individual depends upon the circumstances of each individual.

• It is important to recognise that the value of investments related to the stockmarket (and any resulting benefits such as interest or dividends), can rise or fall and an investor may not get back the amount invested. Past performance data used is for illustrative purposes only and is not necessarily a guide to future performance.

• All copyright or other intellectual property rights in the material constituting this presentation which has been provided by Wealth at Work Limited remains the property of the Wealth at Work group of companies.

WEALTH at work and my wealth are trading names of Wealth at Work Limited which is authorised and regulated by the Financial Conduct Authority and is a member of the Wealth at Work group of companies. Registered in England and Wales No. 05225819. Registered Office: 5 Temple Square, Temple Street, Liverpool L2 5RH. Telephone calls may be recorded and monitored for training and record-keeping purposes.

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