RETIREMENT PLANNING
Wherever you sit in your retirement journey – from starting a pension, to saving more into your pension, or you need help understanding your retirement options – we’re here to support you.
Retirement planning is all about working out how much to save now, so you can live how you want later. Words like ‘pension annuity’ and ‘drawdown’ can seem bewildering, but we’re committed to making it as easy as possible.
SAVING FOR RETIREMENT
This can be done through a personal pension, workplace pension and/or ISA, or through a General Investment Account (GIA), offshore bond or guaranteed solution.
Personal pensions and workplace pensions are generally considered to be two of the best ways to save for retirement. Workplace pensions offer the potential of regular contributions from your employer, meaning extra payments for you.
The value of an investment can fall as well as rise and isn’t guaranteed. You could get back less than you originally invested.ISAs can be used alongside or as an alternative to a pension. There are limits to how much you can pay in each year though and the tax benefits work in different ways from pensions.
The value of an ISA will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than you invested. An investment in a stocks and shares ISA will not provide the same security of capital associated with a cash ISA. The favourable tax treatment of ISAs may not be maintained in the future and is subject to changes in legislation. If you’ve already made the most of the main tax-efficient savings products such as pensions and ISAs but have more to save, General Investment Accounts and offshore bonds are other tax-efficient options.
LIVING OFF YOUR RETIREMENT SAVINGS
There’s lots of flexibility about when and how you retire these days. Here are some of the ways you can access your money saved in a pension:
Drawdown – you decide how much income you take and how and when you want to take it. You can also change the amounts and how often you receive the money throughout your retirement. This option gave you the option to leave a lump sum that you can pass on to a beneficiary when you die – but only if you haven’t used up all the money in your pension pot.
Pension annuities – provide you with a guaranteed income for life. You choose the level of annuity, how often you want to receive your money which will continue to stay this way until you die.
You could also choose to take out some or all of your cash as a lump sum. In most circumstances up to 25% of this will be tax free. The rest will be taxed at your marginal rate.
It may be that you want to have a mix of the options above to suit your retirement needs. That’s ok because you can split your pension pot up to help provide this.
Why do I need a pension?
You probably don’t want to work forever. That means you’ll probably need an income in retirement. One way of securing a retirement income is through a pension. Don’t worry though, they’re not as scary as they might seem. Pensions are simply long-term savings plans – a way to keep the cash coming in when you stop work.
Most people in the UK will get the State Pension when they retire – a regular payment from the Government. You qualify for this through the National Insurance contributions you pay from your wages whilst you work. But the State Pension payment could be a lot less than you think. You can take a look at how much you could get with the State Pension calculator.
Saving for your retirement
Many people think the State Pension on its own isn’t enough to do the things they want to do when they stop work. A way to plug the gap is to start a private pension arrangement that tops up the cash from the State Pension.
You may do this through a workplace pension. If you have a job, you probably already have a workplace pension – or, thanks to automatic enrolment rules, you’ll soon be asked to join one. That means your employer arranges a pension for you and you may save some of your wages into it. Your employer will also add some cash to the pot to help you save.
Whether or not you join a workplace pension scheme, you may also have your own private pension, sometimes known as a personal pension. Any pension contributions you make benefit from tax relief. For example, for every £80 you save into a personal pension, the tax man hands over £20, meaning £100 goes into your pension fund. If you’re a higher or additional rate tax payer you can make a claim for extra tax relief. This could make a massive difference to your pension savings
Your pension explained
So how does a pension work? It’s simply a pot of cash you build up over time, by saving some of your money. Your savings are then invested in the stock market. The idea is that the value of your money – your investment – grows. Then, when you reach a certain age, you start getting an income – your pension.
When you set up your pension you usually get to choose what kind of investment you’d like to make. But it’s important to remember the value of your pension can go down as well as up. Keep an eye on your pot and make sure it’s still on track.
Is having a pension risky ?
As a general rule, the more you save, and the longer you save for, the more your pension pot will grow. That makes sense. But there are other things to think about too; like how you feel about risk – find out your risk profile here
When you start a pension, your pension provider will take your savings and invest them in the stock market for you. That comes with an element of risk – investments can go down as well as up. Generally though, pensions are thought to be one of the safest ways of saving for retirement.
When it comes to investing your pension savings, your provider will usually give you a choice about the kind of fund you want to invest in. Some funds have higher risks than others. Why would you choose a higher-risk investment? Well, usually, higher risks bring the chance of higher rewards, while lower-risk funds are safer, but usually offer smaller returns.
Your attitude to risk might change as you get closer to retirement. For example, some people are happy to take risks when they’re younger, because there is time to top up their savings later on.
And some people prefer to avoid the stock market altogether and save for their retirement in other ways, like through a Cash ISA. It’s your choice – we will do what’s best for your circumstances.
It’s important to remember the value of your pension can go down as well as up. As financial advisors we will help you keep an eye on your pot and make sure it remains on track.
How much should I save?
As a rule of thumb, the more you can save, the better.
Remember that when paying into your pension you receive tax relief on any contributions you make within limits: For every £80 you invest, the government adds £20. If you’re a higher or additional rate tax payer you can make a claim for extra tax relief. So the taxman actually tops up your savings.
For example:
Mike is 30 and wants to retire when he’s 68. He earns £35,000 a year and is aiming for a monthly income of £1,750 when he retires – around 60% of his current pay. He pays 5% of his income into a workplace pension scheme and his employer adds a 3% contribution. That’s a great start. But even taking his State Pension into account, Mike’s savings are still going to fall short of his target. Even saving just a little bit more, could make a real difference to his future.
Choosing a pension
So how to choose a pension? They come in all shapes and sizes, so it’s important to work out what’s right for you. You can talk to our team for some some advice. It’s generally never too early or late to start a pension. How old you are when you start saving can determine how much you need to put aside. For example, if you still have a long time to go until you retire, you’ll have longer to save and your money will have longer to grow. But if you’re already quite close to retirement, it’s probably a good idea to save a bit more. As your life progresses, it’s a good idea to regularly review your pension plan. Say you get a promotion or a new job – why not consider adding any extra cash into your pension pot? Saving a bit extra now will pay off in the long run.
What does my pension provider do with my money?
They invest it on your behalf. There’s usually a small charge to pay – always check the small print. In return, they look after your investment and contact you (usually once a year) to let you know how your money is doing.
What about ISAs
Individual Savings Accounts – or ISAs – are another way of saving for retirement. They’re also tax-efficient – you don’t pay tax on any interest you earn – so they’re another great option. But when it comes to saving for your retirement, it’s not an either/or situation. You can choose to save into any pension product, an ISA, or a combination of both.
Don’t hang around
The sooner you start to save, the more time your money has to grow. But remember to keep an eye on the future. If your circumstances change, change your plans. For example, if you get a promotion, why not put some of the extra money into your pension? But whatever your plans, it’s kind of nice to think that if you save towards your retirement now, you can relax and look forward to the future you want. Speak to one of our advisers to ensure you are on track.