Figures suggest that many households aren’t saving enough to be financially secure in retirement. Calculating what income you’d need to reach retirement goals before the milestone could mean you’re in a better position to reach them.

According to a report in PensionAge, only 43% of baby boomer households below the age of 65 are on track to secure a “moderate” income. The Pensions and Lifetime Savings Association define this as £20,800 for a single retiree and £30,600 for a couple.

On top of this, the rising cost of living is likely to mean more people will struggle to meet retirement goals. If retirees hadn’t considered inflation, including periods of high inflation, when calculating their income needs, they could find they have an income gap.

It’s often stated that baby boomers are in a better position financially for retirement. During their careers, defined benefit (DB) pensions, which provide a guaranteed income and are often generous, were more common.

However, this isn’t the case for all baby boomers, who missed out on the introduction of auto-enrolment, which led to a rise in the number of defined contribution (DC) pensions. As a result, many are relying on the State Pension and their savings.

These financial challenges are further compounded for retirees that didn’t get on the property ladder or are still paying a mortgage.

The retirement income gap could widen, even though more people than ever are saving through a pension.

Research from the People’s Pension suggests that 63% of individuals aren’t saving enough to meet their target. This rises to 68% of Generation X workers, who were born between 1965 and 1980, and 76% of millennials, who were born between 1981 and 1996.

The findings suggest that retirement could fall short of expectations for more than half of workers.

Phil Brown, director of policy at B&CE, the People’s Pension’s provider, said: “Once Generation X starts to retire in large numbers, the UK could face a retirement savings crisis, with people unable to carry on with anything like their current standard of living.”

Are you saving enough for your retirement?

Even if retirement is years away, calculating if you’re on track is a worthwhile task. It can help give you confidence and, if you identify a gap, you’re in a better position to close it.

To understand if you’re on the right track for retirement, you need to bring together how much income you’ll need and how much you are saving now.

What income will you need in retirement?

A vital first step is understanding how much income you will need to reach your goals.

Many retirees find that their day-to-day expenses fall – you may have paid off your mortgage or no longer need to spend money commuting. However, discretionary spending may increase, whether you want to indulge in hobbies or hope to visit some bucket list destinations.

While things can change, setting out a retirement budget now can provide a useful guideline when you’re trying to understand if you’re saving enough.

The current levels of high inflation have highlighted why it’s important to think about how your income needs may change over the years.

Usually, the cost of living gradually rises. So, an income that afforded a comfortable lifestyle at the start of retirement may not stretch as far in 20 years. It’s important to think about how inflation will affect your income.

As well as the cost of living, you should consider how unexpected events could affect income needs too.

How will your pension contributions create an income?

It can be difficult to understand how the pension contributions you’re making regularly will translate into a retirement income.

If you have a DB pension, it will provide a guaranteed income in retirement. The income is usually based on your salary and how many years you’ve been a member of the scheme. Your pension scheme can provide the details that will help you calculate your income in retirement.

If you have a DC pension, it can be a little more complicated. Your pension contributions, along with tax relief and employer contributions, are added to a pot and usually invested. As a result, investment performance is likely to affect your retirement savings. When you retire, you will be responsible for using your pension to create a sustainable income.

Often complicating calculations is that you’re likely to have multiple pensions and other assets, such as savings or property, that you intend to use for retirement.

Bringing together your different assets now to understand how they could deliver an income could help you identify potential gaps.

Contact us to talk about your retirement plans

Assessing your retirement savings is an important step to reaching your goals. If you’d like to work with us to understand how your pension contributions and other assets will provide an income later in life, please contact us.

We can provide some reassurance that you’re on track or create a long-term plan if you are not saving enough.

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.

Levels and bases of, and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.

How much does bias affect your financial decisions? While you may try to make decisions based on facts, it can be much easier than you think to overlook when your decisions are being influenced by emotions or bias.

Last month, you read about why bias occurs and how it can lead to “irrational” decisions through making shortcuts. Now, read on to discover six signs that bias could be affecting your financial decisions.

1. You hold on to certain information

When you make financial decisions, there may be a lot of information to process. So, you may focus on one piece of data. This is known as “anchoring bias” because your view is anchored to the information.

For example, when thinking about how valuable an investment is, you may anchor your view to a previous share price, even if further data means this is no longer accurate. It could mean you choose to hold on to an investment longer than is appropriate because you view it as being more valuable than it is.

This type of bias could mean you’re not looking at the full picture when you make financial decisions as you are blinded by a specific piece of information.

2. You’re too cautious

Often when you think about making investment mistakes, it’s taking too much risk that comes to mind. Yet, being too cautious when making financial decisions could be just as damaging.

Psychology theory suggests that you feel the pain of losses more than the joy of gains. So, it’s natural that you’d want to avoid a loss. That could mean you choose to take too little investment risk or not invest at all due to fear of potential losses.

However, being too cautious could erode value and affect your plans. It could mean you miss out on opportunities to grow your wealth even if they’re suitable for your risk profile and goals.

3. You’re overconfident

In contrast to being too cautious, overconfidence can be damaging too. It can mean you don’t manage risk properly and could lead to reckless financial decisions.

Overconfidence can mean you overestimate your abilities. This can often be seen in investing, where some people may believe they can time the market to maximise returns, despite markets being unpredictable.

Overconfident investors will often attribute “wins” to their skill and knowledge, but when they “lose” it’s blamed on things outside of their control. This mindset can lead to investors taking on even more risk that may not be right for them and a short-term outlook.

4. You follow the crowd

There’s something comforting about doing something that everyone else is. It can make you feel like you’ve made the “right” choice because everyone can’t be wrong, can they?

Herd mentality is another bias that can often be seen in investing. If all your colleagues are talking about an opportunity they believe will deliver returns, you can feel left out if you’re not part of it. You don’t have to know the people to be affected by herd mentality, reading the news or financial commentary can also encourage you to follow the crowd.

It’s a bias that can mean you make decisions that aren’t right for you.

5. You seek information that supports your views

It’s normal to seek out people that have like-minded views. It’s a bias that can affect how you seek and process information too.

Known as “confirmation bias”, some people will place a greater emphasis on information that reaffirms what they already believe. When making financial decisions, that could be that an investment is “bad” or “good”. It’s a process that can mean you discard valuable details without giving them the attention they deserve.

6. You give all information the same level of importance

How you process information can lead to bias. In the case of “information bias”, you give all information the same level of importance even though they could come from very different sources.

When you’re bombarded with information, it can be challenging to decide what to focus on. However, understanding that not all information is equally useful is important.

Knowing which information to discard and which to use to guide your decisions is difficult, but improving this process could help you make choices that are better for you.

Recognising bias can help you overcome it to make better financial decisions

Realising that bias could affect your financial decisions can mean you’re in a position to spot the signs and start to make better choices. Look out for our blog next month for tips on how to reduce the effects of bias.

If you have any questions about your financial plan or would like our support when making decisions, 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.

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.

The Bank of England’s (BoE) decision to scrap some affordability tests for people taking out a mortgage could mean you’re able to borrow higher sums. However, it’s still crucial that you have confidence in your budget and don’t overextend yourself.

From 1 August 2022, lenders won’t have to carry out affordability tests that assess how buyers would cope if interest rates increased.

The decision has attracted some criticism given that interest rates are beginning to climb.

After more than a decade of very low interest rates, the BoE has slowly started to increase its base rate. It now stands at 1.75% and is likely to rise further.

There are concerns that the UK could face an economic recession and households could struggle as the cost of living rises.

However, the BoE has said that it will not withdraw the loan to income (LTI) flow limit. This limits the number of mortgages lenders can extend to borrowers at an LTI ratio of 4.5 or greater. The Bank said this, along with wider assessments of affordability, “ought to deliver the appropriate level of resilience”.

The Bank of England introduced the stringent affordability test after the 2008 financial crisis

The BoE introduced the affordability test, which it is now scrapping, in 2014. It was intended to make sure borrowers did not take on more debt than they could afford and end up “amplifying” a downturn, as happened in 2008.

In 2007, the “credit crunch” was driven by a sharp rise in defaults on sub-prime mortgages. These mortgages, normally issued to borrowers with lower credit ratings, were mainly in the United States. However, the effects spread throughout the world and triggered a global recession in 2008.

According to a report published in the Guardian, repossessions in the UK hit a 12-year high in 2008. Around 40,000 repossessions happened in 12 months, and the high levels continued into 2009.

Growing unemployment and buyers overextending themselves in the days of easy credit – when 125% mortgages were available – contributed to the number of repossessions.

The BoE’s stringent affordability tests were designed to prevent this from happening again, by ensuring that most borrowers could meet repayments.

How will scrapping the affordability test change what you can borrow?

Scrapping the affordability test doesn’t automatically mean lenders will change how they review applications or that you can borrow more.

Lenders still have a duty to lend responsibly. They will also have their own criteria to ensure they’re not taking too much risk by increasing the amount of credit they offer or the people they approve applications from.

However, it could mean you’re able to borrow more than you could before, and some lenders may be more flexible. If you have a good credit score and can demonstrate you’ve reliably paid rent for years, you may find that a lender will now approve your application that was previously rejected.

If you’ve struggled to secure borrowing in the past or affordability tests mean you delayed plans, the change could be good news.

Working with a mortgage broker can help you identify the lenders that are most likely to approve your application. These could be lenders that don’t have a high street presence and you may overlook them if you’re applying for a mortgage alone.

We’re here to offer support and advice if you have any questions about how the changes could affect your goal to buy a home.

Homebuyers should still carry out their own affordability tests

Just because a lender says you can borrow a certain amount, doesn’t mean you should take out a mortgage of this size.

You should still consider how it’ll fit into your budget and other plans you may have. If taking out a mortgage for the maximum amount could mean you’d struggle financially, opting for a lower figure can make sense. It means you can have confidence that you’ll be able to make repayments now and in the future.

Spending some time reviewing your income and outgoings to conduct your own affordability test can mean you’re more financially secure.

Keep in mind that interest rates are rising. If you take out a variable- or tracker-rate mortgage, the amount of interest you pay could increase during the mortgage term. So, you should give yourself some leeway when calculating your outgoings.

Do you want to discuss mortgages?

If you want to take out a new mortgage, whether to buy your first home, step up the property ladder, or borrow more, we can help.

We’re here to offer advice throughout the mortgage process and help you identify which lenders are right for you. Please contact us to discuss your needs and speak to one of our team.

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

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

The day that you send your child or grandchild off to university can bring up mixed feelings. There's pride and joy at their accomplishment, but also fear and worry as they venture out into the world on their own for the first time.

There's also the issue of their financial security, with the National Student Money Survey estimating the individual cost of going to university for the average student is £57,000.

Providing your loved one with a few pieces of key advice ahead of university can help them to deal with any financial issues they may encounter. It can also help to relieve any money-related stress and allow them to better focus on their studies.

So, here are seven lessons to share with your children before they head off this autumn.

1. Why students need to understand how their tuition and maintenance loans work

Your child or grandchild can normally apply for two key loans each academic year, one for tuition and another for general maintenance.

Tuition loans cover course fees and are paid directly to the university, so they aren’t something you or your child need to worry about in the short term.

Maintenance loans are meant to provide for the basic living expenses of students. In England, they are paid in three instalments across the academic year, typically at the start of each term.

For the 2022/23 academic year, students living away from home can receive maintenance loans of up to £9,706 (£12,667 in London). The exact figure is determined by means-testing that is largely based on parental income.

The government website provides a full breakdown of how maintenance loans are assessed.

Additional support can be found through scholarships, grants, bursaries, and hardship funds. These usually depend on a student’s personal circumstances, and they can typically find out more information through their respective university.

Understanding how much they will be paid and when it will arrive is essential for budgeting for the academic year. Maintenance loans don’t stretch very far and will mostly cover rent and utilities.

It may be advisable to pay essential bills in lump sums at the start of each term, even if monthly payments are an option. This can reduce the risk of overspending on non-essential items and leaving key bills unpaid.

2. The pros and cons of overdrafts and credit cards

Student overdraft facilities and credit cards offer plenty of positives for students trying to make ends meet.

Student credit cards can be a useful tool in emergencies, but your child or grandchild may end up paying high interest rates and monthly fees that can be difficult to manage on a student budget.

Overdraft facilities, while often interest-free for students, can leave them with large debts. This could place extra financial pressure on them after graduation.

Understanding the potential pitfalls associated with credit facilities can be a helpful money lesson.

Talk to your child or grandchild about how interest on debt can accrue over time. It may also be instructive to explain how making only the minimum payment could mean it will take years to pay off debt.

Money Saving Expert shares a useful example. Assuming the minimum payment is 1% plus interest or £5, whichever is higher, it would take 27 years to pay off £3,000 of credit card debt. The total interest paid would add up to almost £4,000. This assumes no further spending is made on the credit card and that the interest rate is 17.9%.

3. Why they should be wary of buy now, pay later and other instalment-based options

According to Bloomberg, buy now, pay later (BNPL) apps such as Klarna are one of the fastest growing payment options among Generation Z.

They typically offer a range of alternatives to traditional purchases, such as:

• Buy now, pay 30 days later
• Pay in three instalments
• Longer-term payment plans for larger purchases.

BNPL can be highly beneficial in reducing short-term cashflow issues for students and could help spread the cost of big-ticket items such as a new laptop.

However, BNPL is still a largely unregulated market and doesn’t provide consumers with the same protection as other borrowing options.

Talk to your child or grandchild about how apps like Klarna run the risk of damaging your child’s credit score, and how they could encourage them to spend beyond their means.

4. The advantages of group plans, discounts, and other potential saving opportunities

Collective planning can be a vital part of a student’s financial arsenal. Communicating with housemates and reaching mutually beneficial agreements can spread some of the additional costs outside of rent and utilities.

So, encourage your child or grandchild to find ways of partnering with others to reduce their total expenses.

For example, making essential household purchases (toiletries, cleaning supplies, and food staples) from a communal pot can reduce the total cost. Students can even look at planning weekly meals together to reduce waste and make every penny count.

If you have a family phone plan for your household then you might be able to help reduce any mobile phone charges, especially if devices need replacing in the future.

Similarly, TV or music subscriptions can be collective agreements, whether that’s shared family streaming services or an agreement among housemates.

Students also have a wide range of discounts available to them, from supermarket savings to the 16–25 rail card. You can help your child or grandchild seek out these savings.

5. The importance of factoring in insurance

Students should carefully consider what kind of insurance they’ll need while they are away from home. It is advisable for all students to look at contents insurance.

A study by Endsleigh Insurance estimates that students travel to university with more than £2,000 worth of hi-tech gadgets. So, contents insurance can provide a valuable safety net in the event of theft or damage.

You may be able to add this cover to your own home insurance policy. Teaching your child or grandchild about the benefits of insurance can be a valuable money lesson, so make sure you chat through their needs and whether they have the right cover in place.

6. The benefits of a part-time job

Ultimately, there may come a point where your child or grandchild needs to make up an income shortfall. If you’re financially able to assist your child, it will enable them to focus completely on their studies.

However, for many households, students will need part-time jobs to make up the difference. Having a conversation with your loved ones about potential job opportunities, before they head off to university, may help them make an informed decision.

Sharing valuable hindsight from your own life experiences and pointing them in the direction of useful information can help them select the most appropriate part-time job for their studies and goals.

7. How to carefully plan and budget

Finally, unforeseen emergencies can hit at any time. As a relative, you’ll feel the urge to bail your child out if this occurs, but it would be smart to advise them to keep a “rainy day” fund set aside.

Work out what their outgoings are likely to be every week or month and create a spreadsheet to help them keep on top of their expenses. Learning to budget will be one of the key financial lessons they will learn while at university.

Get in touch

If you have a child or grandchild heading off to university and you’d like advice on how to manage the costs, we can help. Whether you want to cover some of the essential costs or start saving for younger children, putting a plan in place can give you peace of mind.

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