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You’re not sure what to prioritise — your pension, mortgage or your Isa. You’re starting to lose sleep over whether you’re saving enough for your children’s education. And you can’t quite recall whether you have accumulated four, five — or was it six? — pension pots from previous jobs. Now may be time to consider a mid-life financial MOT.
Savers and investors reaching their fifth decade face a series of choices about the right balance of spending and saving to strike as their earnings and expenditure typically peak and retirement planning picks up pace. Thorny questions include the suitable trade-offs between mortgage payments and pension contributions, savings and investments, the correct level of risk in an investment portfolio and the potential for breaching tax relief limits on pension contributions.
Advisers say this time of life is precisely when people should consider conducting a thorough assessment of their finances in the round — and larger institutions from Aviva to the government are now offering services to do just that. For those who are thinking of making their own financial healthcheck, FT Money takes a look at the key issues involved in a mid-life MOT.
“By their forties most people have acquired a number of financial arrangements such as savings, investments, pensions, insurance, but they may not have identified their objectives and are yet to determine whether their current arrangements are the right mix to help them meet their goals,” says James Connor, chief executive at wealth manager Connor Broadley.
A growing trend
Judith Grange, a 46-year-old human resources manager at Aviva, recently decided to reassess her finances through the insurance company’s pilot service offered to employees.
“I kept hearing about the state pension age going up but couldn’t understand if, or how, I would be affected, so I wanted to find out,” she says. “I’m in my forties now and I am starting to think about my future. I decided I wanted a clear idea of what my retirement could look like. I plan to continue working for as long as I continue to enjoy working, but when the time comes to retire I want to be financially secure.”
Aviva’s mid-life MOT is designed to encourage staff to consider aspects of their work, wealth and wellbeing from the age of 45. Face-to-face seminars at its offices are complemented by an “MOT guide” with links to government-backed resources, and a free 30-minute consultation with a qualified financial adviser.
Ms Grange had several jobs before joining Aviva and had lost track of her pension pots. After the session with a financial adviser she combined all the pension pots from her previous employers in one place — and came to firmer conclusions about her financial goals for later life.
The government, led by the Department for Work and Pensions, is also working on a service to encourage people aged 40 to spend some time assessing their finances.
The idea behind a mid-life financial MOT, say experts, is to assess someone’s total financial assets and check that the individual components are working well together. Others say the benefit of an MOT is to get to grips with any problems undermining your financial outlook.
“If you’re smart you lay the foundations for a secure retirement in your 20s and 30s. Then your 40s and 50s are when you really crack on with getting the walls up and the roof on,” says Charles Calkin, partner and financial planner at James Hambro & Partners, a wealth manager. “It takes discipline but this is a time when, hopefully, you’re earning a decent salary and have the opportunity to tuck away healthy amounts.”
Painting the picture
Advisers say most middle to high earners in their 40s and 50s have an eclectic mix of financial products collected over the course of their working lives, so the priority is to determine whether that person is still on track to reach their financial goals.
“Clients often come to me a bit embarrassed about the range of financial products they have and the fact that nothing seems to fit together,” says Claire Walsh, head of advice strategy at Schroders personal wealth. “I just start the meeting gently by trying to get a picture of exactly what they have and what their goals are.”
People typically experience a sequence of major life events in the decades since setting their original financial plan, according to Hannah Owen, financial planner at private client adviser Quilter. “For instance, you may now have a partner or spouse who was not included in plans before,” she says. “An MOT is a good time to evaluate this,” especially if taking time off for childcare has meant each person in a couple has radically different levels of contributions to their pensions.
Those hitting middle age are also likely to be earning a higher salary than when they first laid out a financial strategy; they will have more disposable income; often no mortgage after completing repayments; and their children may have left home. For these reasons, levels set many years earlier on contributions to pensions, savings and investments should be revisited.
Planning will depend entirely on an individual’s circumstances but advisers say one of the things to consider is debt. “If you have an outstanding mortgage then you might want to think about paying some of that off,” says Patrick Connolly, chartered financial planner at Chase de Vere. “A combination of higher earnings and low interest rates can provide a great opportunity to make mortgage overpayments.” He says doing this can significantly reduce the total amount of interest paid and should mean that the mortgage is paid off quicker.
Another key concern for many high earners visiting a financial adviser is whether they will breach the lifetime allowance on their pension, currently £1.055m, and how to protect against this. Pension pots that breach that limit will incur tax charges of 55 per cent. But perhaps even more important than the lifetime allowance is the annual allowance for high earners, says Christine Ross, client director at Handelsbanken Wealth Management, who explains that for earners in this bracket a person’s annual allowance falls from £40,000 to £10,000 as their income rises from £150,000 to £210,000.
“I meet people who are totally unaware that they have exceeded the annual allowance and get a nasty shock when they find they have to meet a tax liability.”
Ms Ross also advises people to review their protection policies including life assurance and income protection. “Another thing I come across time and again is clients who do not have proper financial protection in place,” she says. “When people are employed they tend to have adequate life insurance but as soon as they step away from work in later life they lose their cover — and many have not taken out alternative cover.”
Our appetite and need for investment risk is another factor that changes as we age, and assessing it is a core function of a financial MOT. The closer people get towards retirement, the less time their portfolio has to ride out any market dips. Because of this, many will want to reduce their investment risk in the years approaching that point.
Ms Owen says diversification becomes ever more important at this stage of life and explains that a multi-asset portfolio will have a good mix of assets, including equities, cash, fixed interest and alternatives. However, she adds that it is important not to be too extreme when de-risking your portfolio. “In your 40s and 50s, it is likely that you still have time to grow your assets and it’s important to take necessary risk so you can reap the rewards,” she says.
At the other end of the scale, advisers say clients who are overly cautious with their money and keep too much in cash savings — of which there are many — risk losing money in real terms, as inflation currently outpaces many cash accounts by 1.18 percentage points a year.
If, for example, inflation continues at current rates then £10,000 put into a cash account when you’re 40 will be worth less than three-quarters in real terms — just £7,172 — by the time you retire at 68, according to calculations by James Hambro & Partners. In comparison, if you invested it in a portfolio targeting just 2 per cent above inflation, over that period you would expect it to rise to £17,410. Invest in something targeting 4 per cent above inflation and your money could almost triple.
Advisers suggest clients put their money into different pots to help them think about risk. Savings for things like school fees or a house extension that are due in the next four or five years might go into cash. Savings for retirement — with a longer saving period — can be in riskier assets. Have the right risk profile for the time horizon on each pot.
“Unless you’re planning to buy an annuity at retirement, don’t automatically de-risk your pensions in your late 50s as you approach pension age. That’s when your pot is at its biggest and when the power of compounding is most effective. That money may have to last you for another 40 years, so keep it working when you stop,” says Mr Calkin.
Seven key questions
Claire Walsh, personal finance director at Schroders, raises these questions with clients during a midlife MOT:
- Tell me about your work, family situation, where you live, how you spend your time.
- What are your plans for the next year, five years, 10 years or more?
- Do you anticipate any changes to your financial situation? For example, do you want to reduce working hours, move house, are you facing any substantial expenditure, or are you due any inheritance?
- What are your top priorities in respect of your money? For example, do you want to be tax efficient? To maximise your returns? Or to prioritise your financial security?
- Are there others you need to consider in your financial plans, such as a spouse, children, siblings or other relatives?
- What does money mean to you? Does it represent financial freedom and independence, or do you find it stressful, confusing or an indulgence?
- What are your previous experiences of financial advice and your expectations now?
Maximise tax benefits
Couples often miss out on an obvious means of improving their financial position by holding most of their assets in the name of one person, usually the main breadwinner.
Nimesh Shah, partner at accountancy firm Blick Rothenberg, says that where one person in a couple is not earning, they should consider redistributing their earnings to take maximum advantage of tax allowances such as the personal income tax allowance of £12,500, capital gains tax-free allowance of £12,000 and dividend allowance of £2,000.
Mr Calkin agrees and recommends people significantly increase the amount they save into tax-free savings such as pensions and Isas. “If you spread your savings smartly during this savings build-up phase it is easily possible to get to retirement and have a joint household income of £60,000 or more without paying another penny in tax,” he says.
Parents, children and grandparents
Advisers say part of identifying how much people should save for a life after work is working out how much is needed now to help children with things like education and housing.
“The questions they need to ask themselves here are how much can we afford to do and what takes priority,” says Svenja Keller, head of wealth planning at Killik. She gets clients to think about how they should be setting money aside — in the children’s names or in their names? Or should they be funding this out of surplus income? What tax-efficient savings vehicles are available and can they use them?
She notes that an interesting statistic underlining the importance of starting early, courtesy of the power of compounding. If parents (or grandparents) make a one-off payment for a newborn child into, say, a pension, at certain growth rates this would return more at the age of 60 than someone contributing the same one-off amount every year for 10 years between age 40 and 50.
As people reach middle age, the question of their own parents’ finances and wellbeing also impinges on conversations about financial commitments, say advisers. A starting point for dealing with parental issues in an MOT is to make sure their parents have their affairs are in order, that they have a will and have Lasting Powers of Attorney.
“As the parents get older, they may lose mental capacity and it is good to have everything in order and an understanding of what their financial situation is to ensure that things don’t get messy when the parents need help or are no longer with us,” says Ms Keller.
If long-term care costs become an issue, children are likely to be required to sort out where the funding should come from and what financial help the parents may be entitled to from the council or National Health Service.
When thinking about wills and LPAs for their parents, the 40 to 50-year-olds should put these documents in place for themselves too, say experts.
Transfer of wealth between generations is an issue that looms into view for this age group — both from the point of view of inheriting from parents and thinking about passing assets on to their children.
“Quite often, a good option is to ‘skip a generation’ and ask parents to gift directly to their grandchildren,” says Ms Keller. “This would remove one level of gifting from an inheritance tax perspective.”
She points out, however, that there are other considerations when gifting to the younger generation, such as taking responsibility for the funds received, not demotivating the younger generation and protecting family wealth from future divorces or the “wrong” circle of friends.
But there are solutions that families can consider. “The key is to communicate openly with each other and find a strategy that works for all generations,” she says.
The middle years are often characterised as the busiest period of life. Nonetheless, advisers agree that this is the right time to sit down and take the temperature of your finances.
“People need to look at their finances as a whole rather than focusing on individual products,” says Ms Ross. “Only then can they get a feel for how much they have and how much more they need to save to have the future they want.”
This article was originally published on 21 July 2019.
Greater longevity will take its toll
A hundred years ago, a newborn baby could expect to live into his or her 50s. Someone born today could expect to survive into their 80s — and a record 14,000 people now live beyond their 100th birthday, according to the Office for National Statistics.
“This huge transformation in life expectancy has implications for the way we live. One implication is the expectation that we will work for longer,” says Alistair McQueen, head of savings and retirement at Aviva. He points out that the state pension age for men and women is now rising and is set to reach 68 from 2039. More than 1m people are now working beyond their 65th birthday.
This has significant implications for those in the stage prior to retirement. “Much is written about millennials and baby boomers, but less about the forgotten generation in between,” says Mr McQueen. “This ‘mid-life’ generation is a sector facing significant challenges”.
He explains that this group of individuals will be the first to experience a rising state pension age; the first to face retirement without being underpinned by a gold-plated final salary pension; the first to navigate the pension freedoms and the first to be asked to balance their needs with those of younger and older members of their family.
Aviva suggests such pressures are having a negative effect on this generation of mid-lifers, citing figures from the Office for National Statistics that found those aged between 45-50 were the most anxious and least happy age group in the UK.
This article was originally published on 21 July 2019.
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