Retirement planning

Here are five ways to help with making sure you can afford the standard of retirement you want.

1. Understand tax perks

Pensions remain the most tax efficient means of funding retirement. HM Revenue & Customs (HMRC) gives tax relief on pension contributions that you make that meet certain limits and rules. The total amount that you can pay into your pensions each year is the higher of £3,600 and 100% of your earnings, up to an overall limit of £40,000 a year (the annual allowance).

However, if your income exceeds £240,000 your allowance is reduced by £1 for every £2 of income above this limit, up to a maximum reduction of £36,000. Unused allowances can be carried over for three years to catch up on missed contributions – as long as you’re eligible. Given the tax benefits of pensions, there is also a lifetime allowance (LTA) that restricts the total amount that you can accumulate in all of your pensions, throughout your lifetime, without a tax reduction being applied on the excess amount. The LTA is currently £1,073,100 unless you have some lifetime allowance protection in place that personally allows you a higher amount.

There’s also the option to use an ISA to save for retirement. Contributions are limited to £20,000 for each ISA and there’s no income tax, dividend tax or Capital Gains Tax (CGT) to pay. You don’t have to choose between them – there are merits of using both. Pension and ISA investments can fall in value as well as rise, and you may get back less than you invest.

2. Decide income goals

Choosing a figure for how much income you want in retirement is challenging. Typically, it’s the early years of retirement that will prove most active and therefore the most expensive. The middle years may require less funding as you settle down. Then demands on income likely rise in later years if long term care is needed. Wealth Planners can assess whether your existing capital can survive the fluctuating income requirements and, if not, what can be done to get you on track.

3. Design your retirement

Gone are the days when you have a job for life and stop working once you hit retirement age. There is far more flexibility today, with fewer people moving straight from receiving a salary into drawing a pension. It’s much more common to gradually reduce working days, to start a new part-time job, or even to take on consulting work under a self-employed status. The route you choose will depend on your own ambitions for retirement. You’ll need to decide what those are, choose your starting retirement age, and put in place a strategy to achieve your plan.

4. Don’t rely on selling up to fund retirement

If you own your business, it’s likely that selling it will form part of your retirement plan. Timing the sale to fund your retirement can be challenging. There’s also the chance the valuation might also leave you short if it’s not what you’d hoped for. The same can be said of property. While downsizing is popular to release equity, the success of such a plan depends on the state of the housing market. It’s best not to rely on either as your sole source of retirement income.

5. Know it’s never too early to start planning

There’s no time like the present to kick start your retirement plan. But the earlier you start, the better. You can then set about realistic goal setting and, importantly, diversification of your investments. Combining a mixture of accumulation strategies means you are better prepared in the event of unexpected surprises. It’s also vital to review your accumulation plan regularly to ensure it’s still on track.

Please remember that the value of investments can fall as well as rise. You may get back less than you originally invested.

Next steps

Speak to your Wealth Manager or contact us if you would like to arrange a meeting with a Wealth Planner to discuss your options.

Your Wealth Planner can help you understand the effect of tax on your wealth and offer tax-efficient wrappers for your investments. They’ll be able to guide you towards making the right decision for your financial planning needs. Your planner can't offer tax advice – you should seek that independently. Please bear in mind that tax rules can change in future and their effects on you will depend on your individual circumstances.

This article does not constitute personal financial, tax or legal advice. Each person’s circumstances are different so if you're unsure about investing, you should speak to your Wealth Manager.

It’s also possible to get free and impartial guidance on pension planning from The Money and Pensions Service (MaPS), which is a government-backed organisation.

Things to consider

The value of investments can fall as well as rise. You may get back less than what you originally invested.