Pensions can be complex with so many considerations, including your family circumstances, pension rules and tax regulations.
Fairstone Financial Adviser Ian Morris looks at looks at 10 things to think about when creating a retirement plan for the future.
It is never too early to start planning for your future. When planning for retirement, the truth is that the earlier you start saving and investing, the better off you’ll be, thanks to the power of your money compounding over time. Even if you are in your 20s or 30s and especially if you are older, it’s important to create a retirement plan. There are steps that you can take to improve your pension prospects, no matter what your age.
A retirement plan is different for each and every client and should be tailored to individual circumstances. Within the plan you should factor in how you want to spend your retirement and the areas that will be important to you. Phasing your retirement could be another measure to include in your plan if you are thinking of reducing your working hours or job sharing as you approach retirement.
It’s important to consider how much income and capital you will need in your retirement. This may differ to how much you are living on today. You will have probably paid off your mortgage, the children should be living away from the family home and your overall costs should be lower.
Because of longevity trends, we are on average living longer. With longevity increasing, your wealth may have to provide you and your spouse or partner with an adequate income for 30 or even 40 years.
Longer lifespans, however, raise financial challenges – for individuals as well as for families and society. The idea of a retirement lasting many decades may seem appealing, but a longer retirement could mean more years of living off your pension and savings. Also, you need to factor in inflation, which is currently running at around 2% per annum.
Retirement income is designed to pay for the needs of a client ie utilities, food, insurances, vehicles etc. Retirement capital is designed to pay for the wants of a client ie holidays, home improvements, new cars etc.
Of course, you should receive a State Pension which will provide a small part of your retirement income and this is a factor to consider. But remember that for most of us these payments will not be payable until age 66-68. If you wish to retire or semi-retire from 55 onwards you cannot rely on these payments, although they will add to your income eventually.
There are many things you should consider when looking at later life planning including protecting your estate from Inheritance Tax, making a Will, investigating Power of Attorney and planning for the possibility of long-term care.
The Government encourages you to save for your retirement by giving you tax relief on pension contributions. Tax relief has the effect of reducing your tax bill and/or increasing your pension fund.
If you take pension drawdowns without seeking professional financial advice, you could risk making a mistake. If your pension fund has been diminished due to recent market events, only time will help it recover – and taking money from an already depressed investment reduces the potential for recovery in your portfolio. So be careful how much you take out of your pot while it is still invested or consider suspending withdrawals.
A ‘thinking ahead’ mindset is very important in your retirement planning. Do you foresee changes in your approach to investment management decisions when you retire? It can be hard for some retirees to tone down their risk appetite when investing in retirement. They’ve had decades of practise at investing for growth, after all.
A properly diversified portfolio in retirement is key to maximising returns over a longer life expectancy while managing risk appropriately to avoid significant short-term losses. Retirees can take income from the conservative portion of their portfolios while allowing another portion to continue growing.
Retirement planning is important as it can affect how long your fund lasts and the kind of lifestyle you can afford.