There are so many things to consider when planning for retirement, and it is an area that has constantly evolved over the years as things like retirement age, the cost of living and legislation changes. In ensuring you are making most of your savings now and ensure you have enough money to retire, this guide will help to plan for when that time comes.
Questions surrounding this subject that often arise are ‘Have I saved enough for retirement?’ or ‘How much should I save for retirement?’. However, there is no one-size-fits-all approach to retirement planning; and a financial adviser can help you understand how best to organise your funds if you are hoping to retire at the age of 60.
Things you should consider when planning your retirement
From an Independent Financial Adviser’s perspective, I would like to give you an insight into five common areas that clients may not be aware of when planning for this stage of their life.
1. The cost of living will increase as you get older
It may sound obvious, but inflation will have an impact on how much you need to live on in retirement.
We all know that, over time, prices rise and so, in absolute terms, things become more expensive. We can probably all remember when a packet of Space Raiders cost 10p, or remember wistfully that there was public outcry and protects at petrol stations because the cost of fuel reached £1 per litre. We perhaps don’t notice more general changes, or that the increases can be absorbed a lot more easily because our earnings are rising too, well, hopefully.
Those that run, or have run, their own businesses will appreciate the importance of growth, of improving things year on year, and those that have spent their life employed will also appreciate the need for an annual pay rise. Seldom do we move jobs for a lower salary.
This changes in retirement. Once you cease working, you have a choice; structure your income so that it too rises with inflation – a trick easier said than done – or accept that a set income may reduce in ‘real’ terms as prices rise.
When considering what you will need in future, the starting point is to think about what you need now. Hopefully you’re in a position where you enjoy the lifestyle you’ve created for yourself. How much does it cost? Thereafter, your thoughts can turn to the future – what lifestyle would you like from age 60? How much does that cost?
2. Your expenditure will (probably) reduce over time
The early years of ‘retirement’ will probably be the most expensive. This might be because you have a debt you wish to repay – such as a mortgage – or you are still providing for adult children financially, whether it be education fees, business loans, or a house deposit. It may also be because you’re having the most fun.
By retiring at age 60 – whether this is full retirement or a gradual reduction of hours and intensity – chances are, you will have more time to do what you want, and you’ll be inclined to do it. Whether this is more regular travel, holidays, trips out or time dedicated to hobbies, it’s likely you’ll be spending more money day-to-day because you’re enjoying your time, and you have more time to enjoy.
Over time, this may gradually decrease. Time and tide wait for no man, as the saying goes, and the reality is that when we get older, we will eventually slow down a little. I’m not talking at age 60 or 70, or even 80 for that matter, but as we age, we will eventually become ‘elderly’ or a little less mobile. The change might be imperceptible, but as it creeps up on us, we slow down, travel less, go out less, and spend less.
The exception to this rule is the potential need for nursing care. In extreme old age many of us might require more regular care and, depending on your personal situation and the prevalence of nearby family members, the cost of this care may need to be funded by you. This represents a short-term but significant increase in expenditure at the later stage of life, however, this does not mask the general trend of expenditure decreasing over time as we get older.
When working out how much you will need to live in retirement, you can consider a gradual decrease in expenditure, balanced with the potential need for later life costs.
For expert advice on financial matters why not book a call with a Financial Adviser from Integrity365. Email Integrity365 directly for more information.
3. Your pensions will start at different times
There is a myriad of different pension schemes that have been offered to savers over the years. Rather than provide a detailed breakdown of each, these can broadly be divided in to three categories.
- Your State Pension
The age at which your state pension starts is determined by the Government. You can find your personal State pension age online which will sit somewhere between age 65 and 68 currently, although expect the State Pension Age to increase over time.
The amount of State pension to which you are entitled is determined by your National Insurance record, and it’s worth obtaining a forecast to see if you are in line for full entitlement or if there are gaps in your record. This can also be done online.
You can defer your state pension, but you cannot take it early. When it does start, the pension has the advantage of increasing each year in line with the ‘triple lock’ – so it will always keep pace with inflation.
The later starting age of the state pension obviously means it can’t be considered as an income source from age 60. What is does mean, is that retiring at 60 may be affordable if you’re prepared to draw from your other assets and income sources at an increased rate in the years before your state pension starts. This non-state pension income can then be reduced to a more manageable level from the commencement of the state pension.
- A Salary-Related Pension (aka final salary pension or defined benefit scheme)
If you’re lucky enough to have an entitlement to a pension like this, it is also likely to provide you with an income that increases over time. These schemes are known to be fairly inflexible.
Early access to these benefits is at the discretion of the scheme trustees and, even if they agree, there will be financial penalties if you do so. This means most savers with such benefits access them at the scheme’s pre-defined ‘Normal Retirement Age’. This varies by scheme but is usually age 65, sometimes age 60.
As with the State Pension, factoring in the actual start date of this pension income and the level of it means that you may be able to retire at age 60, provided you have other assets available in the early (most expensive) years of retirement. In a sense, your other assets tide you over the period prior to then start of any guaranteed pensions.
- A Defined Contribution pension (the most prevalent pension plan available, including personal pensions, SIPPs and workplace pensions, amongst others).
These pensions represent a ‘pot’ or investment fund from which, if held in a modern contract that allows access to the full pension flexibility rules, you can access the funds from age 55 (increasing to age 57).
You can access up to 25% of the value of the fund, tax free, in one go. Thereafter, further withdrawals are taxable, but you have full control over how much you draw and when you draw it. You are even able to draw the entire fund in one go if you wish, as long as you’re happy to account for the tax.
These types of pensions complement the others, as they provide an opportunity to draw higher levels of income in the early years of retirement prior to the commencement of any guaranteed income.
When considering how much is enough, it is important to understand how much your pension funds will need to provide in the early years of retirement, and how this will change (decrease) over time.
4. Tax Efficient Saving
Your pensions might not be the best place from which to draw your retirement income. Here’s an irony for you; for many people, your Defined Contribution pensions are the last place you should look when considering the source of your retirement income.
This is because, if structured correctly, your pensions can pass on to your loved ones outside of your estate on death and so be free of Inheritance Tax (IHT) at 40%. It might be possible to pass the funds on completely tax free, depending on individual circumstance.
That’s not to say that IHT should be considered before income requirements. The most important thing is providing the income you need to give you the lifestyle you want – but if you have assets and one of them falls in your estate and the other doesn’t, it doesn’t take a Chartered Financial Planner to work out which one you should look to first to provide an income. The idea of having an all-encompassing financial plan has never been more relevant.
5. You have options
Structuring both your retirement savings and your retirement income in a manner suitable for you is key.
For most people, funding a pension is the most tax efficient way to save within the UK system right now. Those who are employed will also benefit from an employer contribution to their pension funds, thanks to the advent of the auto-enrolment workplace pension rules. A pension is then the starting point for building a future ‘retirement fund’.
However, it is not the only way to save. Many people will look to property as an alternative means of future financial provision, or will build a business, which in due course will provide in later life whether by sale or retaining on ongoing interest.
There are similar – if not more – options available at the point of retirement. As highlighted above, there is a need for flexibility in the provision of income to account for income from different sources, as well as accommodating personal preferences.
Moreover, ‘retirement’ is increasingly likely to be a gradual process, as people continue an active lifestyle from age 60 and beyond. Part of retirement planning may now include a period of part time working or consultancy, or something completely different.
Establishing what retirement looks like for you – in terms of timing, lifestyle, and cost – is the first step to determining how much is enough. Thereafter, the key is to establish a plan that fits this vision, rather than approaching a given date with eyes wide shut.
Written by Marcus Rayer Chartered ALIBF, Integrity365
Customer service is at the heart of everything Integrity365 do, from the early days of pensions and ISAs to investments and lump sum decisions, through to retirement and later life planning, they are here to support you through the key stages of your life with a holistic approach to financial planning.