This guide looks at some of the financial issues to consider when planning for retirement.
How much you need to invest to fund your retirement will depend on a number of factors, including your age and income and when you are thinking of retiring. If you haven’t started yet, then plan to do so now. If, on the other hand you have a retirement funding plan, is it time to increase your pension savings?
How much to save?
Again, this depends on your circumstances but the sensible thing to do is seek to estimate how much income you will want in retirement. Will you be happy with 50 to 65 per cent of your current salary, for example? From there you can begin to forecast and calculate how much you need to save to reach that goal.
We can help you to evaluate your plans and discuss how much you need to save for your retirement.
Where to save?
Contributions to pension schemes are one obvious option, with the associated tax relief acting as an incentive to save. The level of tax relief you receive will depend on your annual income and whether you pay income tax at the standard rate of 20 per cent, the higher rate of 40 per cent or the additional rate of 45 per cent. The amount of tax relief corresponds to the rate of income tax you pay, although the way you receive it differs depending on the type of pension scheme you pay into and whether you’re employed or self-employed.
The amount of your pension savings that benefits from tax relief is limited to an annual allowance of £50,000 for the 2013/14 tax year. There is also an overall lifetime limit of £1.5 million for 2013/14. There is a tax charge where the fund value is in excess of the overall limit and for excess contributions in a year over the annual limit. The annual limit reduces to £40,000, and the overall lifetime limit reduces to £1.25 million, from 6 April 2014.
Personal and stakeholder pensions
You might choose a personal or stakeholder pension if you want to save in addition to your workplace pension, are self-employed or if this is what your employer offers as its workplace pension. Personal pensions allow you to make monthly or lump sum payments into a fund, which is then invested and managed by your pension provider. The amount you get at retirement will depend on how much you paid in and how well the fund’s investments have performed. You can take 25 per cent of the fund as a tax-free lump sum at retirement.
Stakeholder pensions are a type of personal pension but they have to meet certain Government-set standards relating to management charges and your right to make contributions as and when you wish.
Workplace pensions work by putting a percentage of your pay automatically into a pension scheme. In many cases your employer and the Government (in the form of tax relief) also make contributions.
Workplace pensions are either defined contribution schemes, where the amount received at retirement depends on the amount invested or defined benefit, which promise to give you a certain amount each year when you retire regardless of the amount you contribute or how well you fund’s investments perform. Defined benefit pension schemes are now rare.
Automatic enrolment, which began in October 2012, means all UK employers will be required to automatically enrol eligible employees into a qualifying pension scheme by February 2018. You can choose to opt out if you wish.
Self invested personal pensions (SIPPs)
These are a type of personal pension, but one where you choose where your money is invested yourself. Because there is a ‘DIY’ element to a SIPP, charges can be lower and you have more control over where your contributions are invested. However, more choice may lead to more risk and it is essential to seek professional advice.
ISAs (individual savings accounts)
An ISA is not a pension but people are increasingly using them as a savings vehicle for the future. Unlike a pension fund, your money is readily available (depending on the terms of the ISA). ISAs are a tax-efficient saving option as any interest you earn in a cash ISA is not subject to income tax, although any cash held in a stocks and shares ISA is subject to a 20 per cent tax charge by HM Revenue & Customs. Also, deposits into an ISA do not benefit from tax relief, as is the case with pension contributions.
It is important that you tailor your retirement saving strategy to suit your needs and circumstances. Contact us to find out how we can help.
The Basic State Pension
As it stands today, you receive the full basic state pension if you’ve paid or been credited with at least 30 years’ worth of national insurance contributions or national insurance credits before you reach your state pension age.
The current full basic state pension is £110.15 a week, with a system of means-tested top-ups for those who qualify adding to this. The Government has confirmed that a single-tier state pension with a flat rate of £144 per week will be introduced from 2016.
When to retire?
In the not-too-distant future (2026/28), the state pension age will be 67 years old for both men and women. This is a significant change from the 65 for men and 60 for women it has been for quite some time.
The fact that we are living longer may affect when you choose to retire but you may still want to retire at 60 or earlier. The important thing is to plan and save accordingly.
As you near retirement it becomes more important to make sure your finances are in order. Do you have any outstanding debts that need clearing? How has your pension pot fared? Do you know where all of your pensions are? Is it time to start thinking about consolidating them?
Now is the time for a comprehensive review to make sure that you are on track for your retirement. Contact us to discuss this.
When it comes to retiring, the most common way of sourcing income is to cash in your pension savings for an annuity. This method also allows you to take 25 per cent of your pension pot as a tax free lump sum.
There are a couple of important points to consider when it comes to annuities:
- Do not settle for the first deal you are offered. It is important to shop around and you are entitled to do so. You do not have to take what you are offered by your pension provider.
- Declare any ill health or illness. You could qualify for an enhanced annuity, even on the basis of a historic health condition from which you have since been given the all-clear.
Pension drawdown – also known as income drawdown – is a common alternative to an annuity, which sees your pension savings remain invested in the stock market and allows you to take a regular income up to a certain limit. This is a riskier option than an annuity and it is important to seek professional advice.
A professional adviser will be able to help you save for retirement, whatever stage of life you are at. They will help you to assess your savings, restructure your portfolio if necessary and make sure that you are on track to achieve your goals. Contact us to speak to an adviser.