It pays to plan ahead and get the very best out of life in retirement
There is far more flexibility for people considering retirement today. Fewer people today move straight from work into drawing a pension. Many more semiretire and work part-time or volunteer. Others may decide to travel and then return to work. Whatever route you choose will depend on your own retirement dreams, but you need to decide what those are and have a strategy to achieve them.
Today’s workers are less tied to a set retirement age, which opens the door to greater freedom when choosing when you start calling on your fund. Yet having some idea of the time you’d like to move from work into retirement or semi-retirement is important for effective planning.
The next critical stage is to decide how much income you want in retirement – and when. Given the many ways in which people spend retirement today, choosing an absolute figure is challenging. It is likely that the early years of retirement will prove most active and often the most expensive. The middle years may require less funding as you settle down. Then demands on income likely rise again in the final years, when health deteriorates and care has to be paid for.
Retirement planners can assess whether your existing capital might be able to respond to the ebb and flow of income requirements and if not, what action can be taken to get you on course.
Pensions are the tried and tested means of funding retirement and they remain the most tax efficient means of doing so. HMRC gives tax relief on contributions of 100 per cent of earnings up to £40,000 per annum, whichever is the lower.
Any unused allowance can be carried over for three years to catch up on missed contributions. However, there are conditions – for example, you must earn at least the amount you want to contribute in the relevant tax year, and you must be a member of a UK-registered pension scheme in the tax years from which the unused contributions arise.
Pension contributions are also subject to a lifetime allowance of £1.03m from April 6, 2018 (rising each year with inflation), and there are additional complexities about making contributions to a defined contribution plan while continuing to contribute to other pension savings. Pension investments can fall as well as rise in value. The rules governing tax and pensions can change in future and their effects on you will depend on your individual circumstances.
The minimum pension age is 55, and this is likely to rise to 57 by 2028. Alternatively, saving into an ISA is a tax efficient yet accessible means of longterm saving. Contributions are currently limited to £20,000 for each ISA and income is usually tax free. Dividends received on shares within an ISA are tax free and won’t affect your dividend allowance of £2000 from April 2018. ISA investments can fall in value as well as rise, and you may get back less than you invest. Again, the ISA rules can change and their effect will depend on your individual circumstances.
If you own your business it is likely that selling it will form part of your retirement plan. However, selling a business to fund your retirement can be challenging. First is the issue of timing; when the business is most valuable may not coincide with your preferred retirement date. It may also be worth less than you hoped leaving you with a funding gap just at a point where you have limited time in which to make up a shortfall.
The key is to ensure you have a true picture of the business’s worth and do not rely on this alone as your sole source of retirement income.
The same can be said of property. While many retirees plan to downsize and sell the family home, the success of such a plan depends on the housing market.
Successful retirement planning requires early action, realistic goal setting and most of all diversification. Combining a mixture of accumulation strategies means you are better prepared in the event of unexpected surprises. Importantly, revisit your accumulation plan regularly to ensure it is still on track. Always bear in mind that the investments that you hold for your retirement can fall in value as well as rise.
Learn more about estate planning by getting in touch with your wealth manager who can introduce you to one of our wealth planners.
Nothing contained in this article should be construed as constituting legal, financial or tax advice. Tax rules and legislation can change, and the benefits and drawbacks of a particular tax treatment will vary with individual circumstances.
We recommend that you take professional advice where required. You have sole responsibility for the management of your tax, financial and legal affairs, including making any applicable filings and payments, and complying with any applicable laws and regulations.