Retirement has changed. Gone are the days when you’d work for the same employer for decades, be invited into the boardroom on a Friday for a glass of champagne and wake up on Monday morning with a gilt-edged final salary pension to live on for the rest of your life.
Changes to work patterns, lifestyle, health, and pensions means there’s now a lot more flexibility and freedom – but a lot more that could go wrong!
Planning your retirement has never been more important. So, here are five practical steps you should take if you want to achieve the perfect retirement.
1.Spend time thinking about what retirement looks like
So much of retirement planning is not about the financial aspects. Indeed, how can you plan your finances if you don’t have an idea of what you want to do when you stop working?
You’ll need to ask yourself some key questions.
What do I plan to do in retirement?
This is a question you should consider as a couple, as you might find you have different priorities and objectives for your retirement.
As we explained in our recent case study, our clients Susan and Chris had wildly different goals – Susan wanted to travel to places like South America while her partner, Chris, was keen on a staycation somewhere in Dorset!
Having an idea of what you plan to do in retirement will inform how much you’ll need to save now. Plans for extensive overseas travel will require a larger pension fund than spending more time in your garden or with your grandchildren.
How much money will I need?
Once you’ve worked out what you’d like to do in retirement, you need to establish an accurate picture of what it will cost. There are two steps for this:
- Establish the essential spending – how much does it cost you to live your life? What does it cost for food, clothing, heating, and your daily expenses?
- Consider discretionary spending – these are the “nice to haves”. Do you want to replace your car regularly? Go on overseas trips – if so, how many and to where?
It’s important to have clarity on what the cost will be, so we can establish whether you have “enough”. This brings us to…
2. Using cashflow analysis to model your future
Once we’ve established exactly what you want to do in retirement, and how much it will cost, it’s time to analyse whether you’re on course to achieve your aims.
To do this, we use sophisticated cashflow modelling software. We input all your assets – from pensions and investments to buy-to-let property and other income such as your State Pension.
We then look at what expenditure you plan, and factor in one-off sums such as helping out children or downsizing your home. We also make assumptions for factors such as inflation and investment growth.
You can then see, in simple graphical form, what your financial future looks like.
An important step at this time is to model a series of “what if?” scenarios to stress-test your plan:
- What if there’s a significant fall in stock markets?
- What if inflation is higher than predicted?
- What if you spend more than you anticipated?
- What if you live longer than you expected?
- What if one of you has a long-term illness and requires care?
We always robustly stress-test your situation to establish how these factors make you feel as an investor. Could you cope with a market downturn? What’s the contingency plan in the event of market volatility?
Ensuring the models are as accurate as possible can give you real confidence in your plan and in the future.
3. Tax planning while you’re working
Retirement planning starts while you’re still in work – sometimes even decades before. So, for the remaining time you plan to work, it’s vital that you maximise your tax planning opportunities as much as possible.
You should take full advantage of the allowances and exemptions that are available. These might include:
- Maximising your pension contributions to benefit from the generous tax relief on offer
- Making gifts to mitigate Inheritance Tax
- Crystallising gains to use your annual Capital Gains Tax allowance
- Using Venture Capital Trusts or Enterprise Investment Schemes to offset Income Tax.
Tax planning while you’re still working can help you make the most of the available reliefs.
4. Minimising the tax at retirement
Once you’ve made the most of the tax opportunities available while you’re working, it’s then time to minimise your tax liability at retirement. Again, this requires careful planning to ensure you don’t pay more tax than is necessary.
Factors to consider include:
- Planning as a couple – for example, it’s more tax-efficient for a couple to be earning £30,000 each than one party earning £55,000 and the other £5,000. Balancing your assets and income can generate tax savings
- Maintaining incomes below the higher rate of tax, if possible
- Drawing pensions tax-efficiently – while it is now possible to withdraw your entire pension fund as a lump sum, this could easily see you pay 40% or 45% tax on the whole pot. It’s therefore vital to draw your income sustainably and carefully, so as not to pay unnecessary tax
- Combining income from different sources to be as tax-efficient as possible. For example, combing an annuity with pension drawdown income, so tax-free cash and ISAs could be a very tax-efficient way to proceed. Your plan should build these various pots in the correct allocations well before your retirement date.
5. Gain as much peace of mind as possible
In an ideal world, your financial plan should provide peace of mind. The plan should deliver the income that you need, whatever happens to markets, inflation, or the wider economy.
Our aim is to make sure your retirement is shock-proof – ideally that your basic expenditure is backed by a guaranteed, inflation-linked income that won’t be affected by market volatility or external factors. You should also have the right wills and Lasting Powers of Attorney in place to make sure your wishes are carried out.
Then, the money you need for discretionary spending could come from drawdown, investments, or other sources. Here, you might be prepared to accept some risk in order to generate returns over the medium to long term.
After decades of hard work, your retirement is a time to enjoy yourself. The last thing you want to be worrying about is whether you can afford a new pair of shoes or a weekend trip to Bruges.
Get in touch
To find out how we can help you to build the retirement you want, please get in touch. Email firstname.lastname@example.org or call 020 7467 2700 to find out more.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investment (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.
The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances. The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.