The following article is quite abrupt and to the point. It is difficult to write about some of the basic, yet important issues surrounding retirement planning without perhaps touching some nerves. So if you’re easily offended, please move on. My objective here is to help people to understand retirement and to successfully plan ahead for later life. This involves waking up to some serious issues. So please read this in the spirit it is meant and please don’t shoot the messenger.
1. Don’t rely on the State
Rarely, I meet someone who believes the State will have to provide in full for his or her retirement. To receive a full State pension, you have to meet certain conditions and provision in the form of other benefits is available to those who need support. However, we live in a changing world and in these days of austerity, only a fool would put his future in the hands of the British Government. In my experience, those who have the attitude of relying on the state are usually those who are irresponsible now. Clearly, there are those who unfortunately have no choice, such as the unemployed or disabled, who quite rightly rely on state assistance. For the rest of us, we need to wake up to our responsibilities and provide for ourselves.
2. Accumulate assets
When you retire, you will need to live off something. Unless you’ve been born into huge wealth, you cannot rely on inheritance (The Government are too fond of plundering your parent’s wealth for Inheritance Tax and Care Home fees). Doing the lottery does not constitute good financial planning. So when you retire you will need a pot of cash to live off. Obviously this could be from a pension, but it could also be from property, shares, savings, sale of business, royalties; or as is often the case, a combination of these things. So, one way or another, you need to build an asset base that will provide you with an income from that day you retire, to the day you die.
3. Calculate how much you will need
It’s fair to say that most people have no idea of how much they need to accumulate. They base their future wealth on how much they want to put aside now. Many people feel they have little to put aside. We often have this habit of putting aside some of what’s left over after we’ve paid our essential expenses and had our treats; such as holiday’s, cars, alcohol, cigarettes, lottery tickets, clothes etc. However, it is possible to calculate what you need to save, based on your intended retirement age and your required income in retirement, remembering to factor in the effects of inflation. This will give a figure that you need to put aside and will give you a whole new perspective on how many treats you deserve. If you fail to plan; you are actually planning to fail. You will either have not enough or you will have too much. I have seldom met someone who has too much in retirement.
4. Examine your income and expenditure
Make a list of all your income and all your expenses. Hopefully, your income will exceed your expenses by a reasonable margin. You will soon see that some of your expenses are essential, some are important, some are treats and some are a complete waste of money, like the gym membership that you don’t actually use. You may find that you can live very comfortably and you tend to use the excess for another meal out, another holiday, another car upgrade. We can all live up to our income, but a wise person takes an objective look at their habits and exercises some restraint and discipline over their spending.
5. Save something every month
We humans like to form habits. I guarantee that you have them. They are things that you do on a regular basis such as putting the kettle on when you wake up, or going to the pub every Friday, or buying a newspaper on the way to work. If you set up a direct debit, your money will leave your bank account every month and you may not even notice it. It will become one of those habitual things you do like paying the mortgage or your gym subscription. Saving is a good habit; spending money on non essentials is a habit that will impact on your future wealth. Put yourself first and put something aside for your future. Unless you have a very good employer or spouse, who else will do this for you?
6. Get a state pension forecast
We’ve established that you can’t rely on the State. However, to calculate your need, it is useful to find out how much you should expect from the State. This will often comprise both the basic state pension (currently £102.15 per week, with an additional £61.20 for spouse) and an additional earnings related amount. To request your forecast, go to www.direct.gov.uk
7. Be tax efficient
Having decided to put aside some money for your future, where’s the best place to put it? Now let me make one thing abundantly clear. Unless you are some kind of expert in making your money grow, perhaps by buying and selling property, you need to rely on a packaged solution. So, your choices are things like banks accounts, ISAs, shares, bonds, pensions etc. Pensions are by far the most tax efficient way of saving for your future. You receive tax relief when you invest; your money grows in a tax efficient environment and you can take up to 25% of your accumulated wealth free of tax. At this point of the discussion, people often cleverly proclaim that you have to pay income tax on the pension income. Well of course you do, that’s what income tax does. However, up to this point you will have benefited from the gross roll up of your investment growth and you will normally find that this income tax is not so harsh due to your lower income and age allowances. Shrewd high rate tax payers will receive 40% tax relief when they invest their money, but pay only 20% when they take their income. Additional rate tax payers will receive 50% tax relief. They are really missing a trick if they don’t make pension contributions.
Also, it can be good to build an ISA portfolio. You will get no tax relief on contributions, but you will be able to take any income yield tax free, which is a nice way to supplement your retirement income.
You may also want to explore the tax advantages of Venture Capital Trusts or Enterprise Investment Schemes. However, these are strictly for the risk aware.
8. Invest in good funds
Some people I meet are troubled by pensions, because they believe pension funds to be inherently poor. Now let me clear this up by saying that the choice of funds available within pensions is immense, so it is no surprise to hear reports of underperforming pension funds. The key thing here is to invest in well managed funds. I sometimes meet people who prefer ISAs because they believe the funds are better. This is a huge error. Almost any fund that is available as an ISA is also available within a pension. Do your research and invest well. There are numerous well managed funds which consistently deliver strong investment returns.
9. Establish your tolerance to risk
When selecting a fund, or a portfolio of funds, it is important that these suit your attitude to investment risk. You need to understand the nature of different fund types, to establish how they fit with your attitude towards risk. If you’re cautious, you need to consider cash, gilt, or corporate bond funds. If you’re speculative, you should look at overseas opportunities. As you approach retirement, you will need to consider consolidating your accumulated funds by switching into lower risk funds, to avoid and sudden market downturns. Some providers offer a strategy to lower risk as you approach retirement. Inevitably, a good portfolio will spread your risk among suitable funds.
10. Don’t put all your eggs in one basket
Your parents should have taught you this one. Don’t pin your hopes on one fund manager. Spread your risk. Preferably, don’t just use pensions. If you know how to grow money some other way, then do that. However, still use financial products such as pensions and ISAs as part of your overall strategy.
11. Don’t be put off by charges
This is one of the things that stops some people saving. They are troubled by fees and commissions. They expect to be paid when they go to work, they expect to pay for their cars and holidays, but they have an aversion to paying for financial advice and the service that goes with it. Charges are a fact of life and there is no escape. If you’re reluctant to pay the charges, then you won’t have the plan. Simple!
12. Don’t believe all you read
Journalists become successful by writing attention grabbing articles and have a lot to answer for. They face no penalties for inaccuracies. Financial Advisers become successful by building a solid, long term business where their clients return to them time after time. Most products advised by Financial Advisers are policed by the Financial Services Authority.
Journalists report using shock headlines such as: ‘Millions wiped off pension plans’. It’s no wonder people are put off. They never report the times when ‘Millions are added to pension plans’ which does happen on a regular basis. Some journalists have diligently studied the subjects they report on, but please never rely on these people for your advice. They are simply unqualified and unaccountable for their opinions.
It’s no secret that investment funds can fall, but please remember that they can also rise. Over the longer term (which is what you have for retirement planning) the chances of loosing value is greatly diminished and the chances of gaining value is greatly enhanced. Just yesterday I met with a client who invested a lump sum of just £500 in a pension fund during the 80’s. His fund value is now approaching £40000. Under the terms of his contract, he will expect an income of about £3600 per year from age 60 for the rest of his life. You will not read about this unusual, yet true story in the Daily Mail.
13. Shop around
If you know what you’re doing, shop around the different pension and savings products. Now let me explain the role of an Independent Financial Adviser (IFA).
An IFA shops around for you; he knows the names of all the shops; he knows the contents of their stock; he understands how their products can be used; he speaks to the suppliers and he knows where to find value for your money.
Find an IFA, preferably one with many years of experience, who is recommended by someone you can trust. Also choose someone with a good local reputation. We value our reputation and so should they.
14. Review your plans
You may now have the best retirement plan in the world, but we live in a fast changing world. 20 years ago, I wouldn’t have set foot in a Skoda, but now I might even buy one. Pension providers have changed. Some have gone and new ones have arrived. Legislation has changed, product design has changed and fund choice has absolutely exploded. It is vital to make sure that the plans you have, remain appropriate for you.
You may be sitting on an old company pension scheme. You may have contracted out of the state earnings related pension. Examine your plans and make sure they remain suitable. They can and sometimes should be changed.
I could go on, but let’s keep this article to a manageable and readable size. I sincerely hope that this helps you to consider your own position. We provide regular financial updates, so please continue to visit our website and watch out for our updates on Facebook or twitter.
Please note that this article is based on current taxation and legislation.
Please be aware that funds can fall as well as rise in value.
The above is for guidance only and should not be construed as advice, as financial planning depends on your personal circumstances.