Planning for retirement
Aubrey de Grey, Cambridge University geneticist, postulates that somebody alive today can expect to live to 1000 years old. His prediction may be extreme – but our lives are getting longer.
It’s generally thought that those looking to retire at 65 need to plan for at least another 25 years. So the sooner you start, the better. Here are eight tips for ensuring you have enough to fund the lifestyle you desire.
1. Decide what retirement looks like
There is far more flexibility for people considering retirement today. Fewer people today move straight from work into drawing a pension. Many more semi-retire and work part-time or volunteer. Others may decide to travel and then return to work. Whatever route you choose will depend on your own retirement dreams, but you need to decide what those are and have a strategy to achieve them.
2. Set a target retirement age
Today’s workers are less tied to a set retirement age, which opens the door to greater freedom when choosing when you start calling on your fund. Yet having some idea of the time you’d like to move from work into retirement or semi-retirement is important for effective planning.
3. Set an income
The next critical stage is to decide how much income you want in retirement – and when. Given the many ways in which people spend retirement today, choosing an absolute figure is challenging. It’s likely that the early years of retirement will prove most active and often the most expensive. The middle years may require less funding as you settle down. Then demands on income likely rise again in the final years, when health deteriorates and care has to be paid for.
Retirement planners can assess whether your existing capital can respond to the ebb and flow of income requirements and if not, what action can be taken to get you on course.
4. Understand the benefits of pensions
Pensions are the tried and tested means of funding retirement and they remain the most tax efficient means of doing so. HMRC gives tax relief of 100 per cent of earnings up to £40,000 per annum, whichever is the lower. However if your income is over £150,000 your allowance limit will be reduced by £1 for every £2 of income above this limit, up to a maximum reduction of £30,000. Under the pension flexibility rules you can access your fund from the age of 55, however this may reduce your annual allowance to £4,000.
Any unused allowance can be carried over for three years to catch up on missed contributions. However, there are conditions – for example, you must earn at least the amount you want to contribute in the relevant tax year, and you must be a member of UK-registered pension scheme in the tax years from which the unused contributions arise. Pension contributions were also subject to a lifetime allowance of £1m from 6th April 2016, and there are additional complexities about making contributions to a defined contribution plan while continuing to contribute to other pension savings. Pension investments can fall as well as rise in value.
5. Think about ISAs
Pensions can mean locking your money away until age 55. Alternatively, saving into an ISA is a tax efficient yet accessible means of long-term saving. Contributions are currently limited to £20,000 for each ISA and income is usually tax free. Dividends received on shares within an ISA will remain tax free and won’t affect your dividend allowance of £2000 from April 2018. ISA investments can fall in value as well as rise, and you may get back less than you invest.
6. Think carefully about selling your business
If you own your business it’s likely that selling it will form part of your retirement plan. However, selling a business to fund your retirement can be challenging. First is the issue of timing; when the business is most valuable may not coincide with your preferred retirement date. It may also be worth less than you hoped, leaving you with a funding gap just at a point where you have limited time in which to make up a shortfall.
The key is to ensure you have a true picture of the business’ worth and don’t rely on this alone as your sole source of retirement income.
7. Think carefully about selling your home
The same can be said of property. While many retirees plan to downsize and sell the family home, the success of such a plan depends on the housing market.
8. Act early and often
Successful retirement planning requires early action, realistic goal setting and, most of all, diversification. Combining a mixture of accumulation strategies means you are better prepared in the event of unexpected surprises. Importantly, revisit your accumulation plan regularly to ensure it’s still on track.
You need to bear in mind that tax rules can change in the future and that their effects on you will depend on your individual circumstances. We do not offer personal tax advice and recommend that you get independent advice.